What Slashing Production of iPhone X Means for Apple
There's little evidence that customers are switching away from Apple toward Android-based devices, and this customer lock-in remains the source of Apple’s narrow moat.
Various news outlets, including the Nikkei Asian Review and the Wall Street Journal, have reported that Apple (AAPL) is planning on slashing production of its hero device, the Apple iPhone X, from 40 million units to be built in the March quarter down to 20 million, in light of sluggish demand.
We’ve seen enough reports thus far to suggest to us that there is smoke to this fire as we await Apple’s earnings report and revenue forecast for the March quarter on Thursday, Feb. 1. While these reports can only be considered as a negative for Apple, we remind investors that the iPhone X is only one of the three new models (along with the iPhone 8 and 8 Plus) launched by the firm a few months ago. A product mix shift toward the 8/8+ would not be a catastrophe.
The bigger concern is that customers were priced out of buying the X, did not see enough reason to buy the 8, and are instead holding on to their devices for another year, thus elongating the iPhone replacement cycle. Apple’s software dilemma around slowing down older iPhones, and in turn expanding its battery replacement program, might be leading even more customers to retain their current devices.
We are maintaining our fair value estimate for narrow-moat Apple as we await the firm’s earnings report on Thursday. With shares down close to 10% from its all-time high of $180 earlier this month, we view Apple’s shares as fairly valued today.
As we take a longer-term view of Apple, the most important consideration is that we see little evidence that customers are switching away from Apple toward Android-based devices. This customer lock-in, driven by an array of Apple-developed and Apple-hosted hardware, software and services, remains the source of Apple’s narrow moat.
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Brian Colello does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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