Are Apple’s iPhone 8 Production Cuts a Red Flag, or Business as Usual?

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I wrote about iPhone 8 sales a few weeks ago, as reports were beginning to infer that the device was performing poorly so close to its launch. There is more grist for the rumor mill this week, as there are reports that Apple has scaled back production by more half. On the surface, this move seems to indicate that the phone is selling well below Apple’s expectations, especially when paired with Reuters’ report that the iPhone 7 is outselling the 8 right now. However, these individual reports still can’t be viewed in a vacuum. Let’s step back from the ledge for a second. and try to put everything in context.

First off, we really won’t have a full picture until we get some hard numbers from Apple’s Fourth Quarter Investor Call. Even then, it is unlikely that Apple will break out individual model sales, especially if sales of the 8 and 8 Plus are below expectations. However, the totals will still tell us how well everything other than the iPhone X are performing right now, and that is still a very important indicator.

As I said in my previous article, Apple is basically making pure profit on their older models. The bills of material have gone down, those production lines are paid for and the manufacturing processes are running at max efficiency. If the iPhone 8 is being canabalized by a combination of older, less expensive models and those holding out for the X, then there is no problem here. It may indicate that a new model with an older design is no longer warranted in future years, but Apple will still be making their usual profits. If sales are disappointing overall for this quarter, then everything will depend on how well the iPhone X sells, which we won’t start to see until the First Quarter numbers for 2018. However, Apple’s guidance for that quarter will tell a lot about how they expect the X to sell, and how well they will be able to meet demand.

There are a few writers and analysts who have a more measured take on this news of iPhone 8 production cuts who I wanted to point out. First off, longtime tech reporter and Apple expert Philip Elmer-DeWitt shared an investor note from Raymond James’ Travis McCourt. His informed take as an analyst is basically we don’t know anything solid yet, so everyone just needs to wait a bit before jumping to conclusions. He also says that the 30% drop in demand for the 8 and 8 Plus in comparison to the 7 and 7 Plus reported by Verizon actually lines up with the 60%/40% split in X and iPhone 8 and 8 Plus sales that they are projecting. However, we won’t KNOW if this is the case until the X has been on sale long enough to catch up with demand.

Mr McCourt also points out what could be the most obvious point in all this back and forth over the iPhone 8 and 8 Plus. The iPhone 8 production cuts could be exactly what Apple has been planning all along.

We do know that Apple’s production plans included manufacturing a disproportionate amount of 8/8 Plus in August-October, and then transitioning production to the iPhone X. Therefore, news stories that indicate iPhone 8/8 Plus production is being cut, are simply not meaningful to understanding iPhone demand in totality.

Mark Hibben with Seeking Alpha also gives a measured take on the situation that calls out the “lack of technical sophistication” shown by some analysts. He expresses no surprise that the 7 may be outselling the 8, and reiterates what should be common knowledge by now- the iPhone 8 and 8 Plus were never going to sell like traditional flagship iPhones because they aren’t set up or designed to be.

Eric Jhonsa with The Street breaks everything down, both positive and negative in his article Why Reports of Weak iPhone 8 Sales Are Unsurprising and Nothing to Worry About. He remains positive in spite of the reports questioning both iPhone 8 sales and iPhone X production because of the “stickiness” of the iPhone ecosystem. He has a good point. All of the indicators point to Apple users waiting for the new iPhone of their choice, rather than bailing for a competing Android model. There will always be some who switch, but those people are likely already factored into normal statistics. He also makes another interesting point that all of what is going on may have already been accounted for. Mr Jhonsa says:

But over the same time, the consensus estimate for March quarter revenue has risen by $2.4 billion to $66.2 billion (implies 25% growth). And judging by how Apple’s shares have moved since the Sept. iPhone event, as well as by the fact that shares trade for just 14 times the company’s fiscal 2018 GAAP EPS consensus estimate before accounting for cash, it definitely feels as if any concerns about weak pre-Christmas iPhone shipments have been priced in.

That’s true even if the amount of time needed by markets to grasp the issue is a little startling.

Basically, we have a few people who really know what they are talking about calling out the click-bait and market mini-panic over the iPhone 8. We just don’t have all of the facts on how it is doing in comparison to Apple’s expectations yet, and it will likely be a while before we do. I know it isn’t the “Internet Way,” but let’s just all step back and listen to some sound advise- let it play out. Time and the hard numbers will eventually tell us all we need to know. Until then, smart investors would be wise to resist the urge to jump off the good ship Apple.


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