Analysts with Credit Suisse had some bad news to share with Apple (AAPL -0.35%) investors in a research note published on Dec. 1. According to the analysts -- who, I might add, have an "outperform" rating on the stock and a $140 12-month price target -- supply chain checks suggest "iPhone supply chain orders will be weaker than originally forecast."
In the note, the analysts say its Asia Tech Team has reconfirmed that Apple has "lowered its component orders" relative to initial expectations. The iDevice maker reportedly expects to build between 70 and 75 million iPhones during the December quarter and between 45 and 50 million in the following quarter.
"The cuts seem to be driven by weak demand for the new iPhone 6s," they write.
In light of this information, the analysts estimate the company will sell 78 million iPhones in the December quarter (up from 74.47 million units a year ago) and 55 million units in the March quarter (down from 61.17 million a year ago).
For the full year, they're looking for 222 million units, down from the 231 million units sold during the company's fiscal 2015, or about 3.9%.
In this article, I'd like to discuss the following topics:
- The implications of a weak iPhone 6s/6s Plus cycle on Apple shares.
- What Apple can, in my view, do to try to ensure it can grow iPhone from here on out.
Potential implications, if true
In a prior note, the analysts said that iPhone 6s/6s weakness could keep Apple shares range-bound between $100 and $130 per share over the "next few quarters," which seems quite reasonable to me if their iPhone unit sales estimates for the year prove accurate.
That said, they think the long-term picture is still positive for a number of reasons such as Apple's iPhone Upgrade program accelerating iPhone user upgrade rates and a growing iPhone installed base driving "future upgrades beyond the next few quarters."
I think these factors, coupled with the significant improvements and chassis redesign that Apple will most likely bring with the iPhone 7, should help iPhone return to growth (if it stays flat or declines in the current fiscal year) during the coming iPhone sales cycle.
What might have gone "wrong"?
In the current iPhone cycle, Apple has had a number of things working against it. Firstly, the company has to deal with very tough comparisons to the prior fiscal year (and product cycle) during which Apple saw substantial unit and revenue growth.
However, if it's true that iPhone 6s/6s Plus demand is relatively tepid, my guess is this could be driven by many, if not most, customers finding the improvements Apple brought to the iPhone 6s/6s Plus not compelling enough to warrant shelling out for upgrades.
Indeed, although the iPhone 6s/6s Plus contain a number of very great performance enhancements and technologies (this is probably the biggest generation-on-generation leap in internals for iPhone), as well as support for 3D Touch, the phones still basically look identical to the prior generation phones. They even got a bit bulkier.
The new phones also use the same displays that the prior generation iPhones did.
This means in the three areas that typical customers seem likely to notice immediately (chassis design, display, and weight/thickness), Apple kept things the same in the first two and actually regressed in the third.
How does Apple avoid a repeat of this?
I don't think Apple will see a massive generation-over-generation demand boom for iPhones akin to what I saw with the iPhone 6/6 Plus cycle anytime soon, which should mean (for better or for worse) that Apple won't need to deal with such difficult year-over-year comparisons over the next few years.
That said, it might be time for Apple to consider moving away from its current product release cycle in which it releases a "numbered" phone (i.e., iPhone 4, 5, 6) in one year and then an "s" version of that phone (i.e., iPhone 4s, 5s, 6s) in the following year.
Instead, Apple could release redesigned devices each year to spur demand.
Or if Apple does choose to continue with the current release strategy, it might be a good idea for the company to at least improve display technology on a yearly cadence (Apple currently upgrades the displays only on non-"s" releases).
Even if Apple's "s" phones look the same from afar, dramatically improved displays (in terms of color accuracy, contrast, resolution, etc.) generation over generation could help drive quicker upgrade cycles, particularly as that's the sort of thing customers could notice in-store (and reviewers notice as they use the devices).
We'll have to see how this all plays out
It's important to note that these aren't official numbers from Apple; they're third-party estimates. This means that while you should certainly pay attention to them, you shouldn't, at the risk of this sounding like a boilerplate safe harbor statement, place undue reliance upon them.
Although for the reasons I mentioned above I wouldn't be surprised if the iPhone 6s/6s Plus cycle turns out to be weaker than Apple had hoped, I think long-term investors should wait to see what Apple management has to say about the demand trends for iPhone 6s/6s Plus before jumping to conclusions either way.
