According to analyst Jun Zhang with Rosenblatt Securities (via Phillip Elmer-DeWitt), Apple (NASDAQ:AAPL) "may be planning to cut iPhone X production for the June quarter by as much as 10 million units."
That drastic reduction, the analyst says, would bring output in the quarter to just 15 million units.
While this might sound like terrible news for Apple, Zhang thinks these production cuts may be driven by Apple choosing to discontinue the device altogether after this product cycle as it shifts production to its trio of next-generation iPhone models.
Typically, when Apple introduces new iPhones, it reduces the prices on the previous generation models in an attempt to address a wider market. It seems as though Apple won't be doing so with the next generation iPhone lineup.
Here's why that makes perfect sense.
Expensive to build, but not competitive
For those of you unfamiliar with the rumors around Apple's next-generation iPhone lineup, Apple is expected to put out three new iPhones this year. The first is supposed to be an upgraded version of this year's iPhone X -- same size display and same basic shape, but improved internals and, potentially, upgraded display technology.
The second is supposed to be similar to the upgraded iPhone X, but with a larger 6.46-inch display. And, finally, the third is expected to be a cheaper version of the iPhone X with a less-advanced liquid crystal display (the iPhone X, its successor, and its larger sibling all use or will use more advanced organic light emitting diode, or OLED displays).
All three new iPhones are expected to include the company's upcoming A12 processor as well as upgraded cellular modems, which will make the phones faster and more capable than this year's iPhone X.
Indeed, with that knowledge in mind, it's actually quite easy to see why Apple would choose to simply discontinue this year's iPhone X instead of discount it and continue to sell it: This year's iPhone X will be more expensive to produce than the next-generation iPhone with a 6.1-inch LCD, and it'll have worse internal specifications.
On top of that, the Rosenblatt analyst thinks the successor to the current iPhone X could be priced cheaper out of the gate, at between $799 and $999. If the successor to this year's iPhone X sells at a lower price than the current model, and if Apple is planning a targeted, cost-reduced version aimed at lower price points, there simply isn't room for the current iPhone X in next year's iPhone lineup.
Ultimately, it makes sense for Apple to build targeted products in each generation to address the most important price points. Last year's products sold at a discount can either simply not be competitive enough, or they might simply be too expensive to support Apple's desired profitability targets.
Building out a broader portfolio of products to span a wider range of price points does require additional engineering effort, marketing spend, and increases in all the other costs required to bring a high-volume product to market.
However, for a company like Apple that generates almost $150 billion per year in annual revenue from iPhone sales alone, the potential return on Apple's investment in broadening out its iPhone portfolio is enormous.
Ashraf Eassa has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.