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iPhone X: Apple Investors Are Asking the Wrong Question

By Adam Levine-Weinberg – Oct 30, 2017 at 8:25AM

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It doesn't matter if Apple can't build enough iPhone X devices for the holiday season if iPhone fans are willing to wait as long as it takes to get one.

Demand for Apple's (AAPL -1.96%) new iPhone 8 and iPhone 8 Plus devices has been lackluster, according to multiple independent research outlets. Slow adoption of these models, however, is not very surprising, nor is it very worrisome. Huge numbers of Apple fans have been waiting to buy the more innovative iPhone X, which is set to hit stores later this week.

Indeed, lead times quickly ballooned to more than a month in multiple countries after iPhone X pre-orders began last week. As a result, many Apple investors have a new concern now: Will Apple be able to build enough iPhone X devices to meet demand during the holiday season? However, that's not really the right question to be asking.

Why some investors are worried

Apple shares have soared more than 50% since last November in anticipation of an iPhone "super-cycle" following the launch of this year's models. The iPhone X's premium price -- the cheaper model still costs $999 -- could drive strong sales growth for Apple in the coming year.

Front and rear views of the iPhone X in silver and space gray colors

The iPhone X is the most expensive iPhone ever. Image source: Apple.

However, the investment community doesn't know what to expect for the upcoming holiday quarter. A year ago, Apple posted record quarterly revenue of $78.4 billion and earnings per share of $3.36 in its first fiscal quarter. For the same period this year, analysts' revenue estimates range from $78.15 billion to $100.29 billion. EPS estimates are even more dispersed, ranging from $3.34 to $4.86.

The biggest wild card is iPhone X supply. Apple has faced severe supply constraints for various iPhone X components, causing it to fall short of its initial production plan. Long wait times for iPhone X pre-orders appear to corroborate the stories about supply constraints.

With the iPhone 8 family selling relatively slowly, low iPhone X supply could be a significant constraint on Apple's sales during the holiday quarter. As a result, some investors are worried that Apple may provide disappointing guidance when it reports earnings this week.

That's not the right question

The iPhone 6 Plus in black, silver, and gold color options

It took Apple months to reach supply-demand balance for the iPhone 6 family. Image source: Apple.

The obsession with Apple's ability to meet holiday-quarter demand for the iPhone X is probably misplaced. Three years ago -- in the midst of the last iPhone super-cycle -- Apple failed to reach supply-demand balance by the end of December. Since then, the iPhone installed base has grown significantly. Furthermore, the iPhone 6 and iPhone 6 Plus went on sale in late September, compared with early November for the iPhone X.

Thus, it's virtually certain that Apple will be unable to reach supply-demand balance for the iPhone X by year's end. (For comparison, iPhone 6 and iPhone 6 Plus lead times ranged from a few days to a few weeks at this time in 2014.)

The real question to be asking is whether customers will be patient and wait for the new iPhone X, or if the long lead times will scare away potential buyers. In the long run, it doesn't matter whether someone buys an iPhone X in December or in February. By contrast, if many would-be iPhone X buyers opt for a cheaper iPhone model or, even worse, a competitor's product, Apple would suffer real harm.

The risk is minimal

Some iPhone fans are certainly upset about having to wait a few weeks for an iPhone X despite having stayed up late -- or woken up early -- to place a pre-order right at 3 a.m. ET on Friday. However, that doesn't seem to be deterring many people from preordering an iPhone X.

In fact, there is good reason to think that long wait times will have little to no impact on sales of the iPhone X over the next year. Scarcity can actually increase demand in some cases, as a product's lack of availability can make it seem more desirable.

This is particularly true in status-conscious countries such as China and India. iPhone sales in the "Greater China" market have fluctuated wildly in recent years, based on the distinctiveness of each year's design. Based on its high price and current scarcity, the iPhone X could become the ultimate status symbol in China, driving a return to strong growth there as supply improves.

The implication is that investors shouldn't be too concerned if Apple's first quarter guidance is worse than what some analysts have been predicting. Slower growth in the first quarter would probably be offset by faster growth in the second quarter, as supply catches up to demand. Either way, Apple is on track for another big win with the iPhone X.

Adam Levine-Weinberg owns shares of Apple and is long January 2018 $90 calls on Apple, short January 2018 $140 calls on Apple, and short February 2018 $160 calls on Apple. The Motley Fool owns shares of and recommends Apple and is long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.

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