Apple Earnings Could Be Helped by iPhone 11 Excitement, but the Story Is More Complicated. - Barron's

Apple iPhone 11 Photograph by Carsten Koall/Getty Images

Apple shares are rallying as investors get more confident about sales for the new iPhone 11 lineup. But the good times may not last.

Last month, the company unveiled the iPhone 11, iPhone 11 Pro, and iPhone 11 Pro Max. Those new phone models have faster processors, improved camera quality, and better battery life. The new iPhones became available Sept. 20.

Since then several Wall Street analyst have raised their price targets on Apple (ticker: AAPL) stock, citing improving iPhone sales momentum.

Apple shares are up 7.8% over the last month, versus a 1.4% decline for the S&P 500.

On Oct. 4, Nikkei reported that Apple had told suppliers to increase production of the latest iPhone 11 lineup by up to 10%, or 8 million units. The order increase is mainly for the less expensive iPhone 11 and 11 Pro models, while Apple reportedly slightly lowered its orders for the higher-priced 11 Pro Max, the media outlet said.

But there are several factors that investors should take into account before assessing the iPhone 11 cycle. First and most important, Apple has reduced pricing for its low end model iPhone 11 by about 7% versus the comparable iPhone XR last year. Price cuts are a slippery slope for future profitability even if it does help demand.

Second, the timing of the iPhone 11’s release is five weeks earlier than the iPhone XR’s launch last year.

“This year’s all-at-once launch timing vs. last year’s staggered release schedule could also skew the year-over-year comparison,” Credit Suisse analyst Matthew Cabral wrote on Monday.

In many ways this current cycle is reminiscent of the iPhone 6S cycle, which started in 2015. The iPhone 6S was an incremental upgrade versus its prior year with largely the same physical form factor, just like the iPhone 11. In Sept. 2015, Apple touted initial sales saying, “Sales for iPhone 6s and iPhone 6s Plus have been phenomenal, blowing past any previous first weekend sales results in Apple’s history.”

But like this year, there was a staggered release mismatch as the iPhone 6S launched in China in late September 2015 versus mid-October 2014 for the previous year’s iPhone 6.

After the initial better than expected results, the iPhone 6S cycle fell apart. In April 2016, Apple reported a disappointing sales decline and earnings miss.

In similar fashion, Rosenblatt Securities analyst Jun Zhang predicts iPhone sales will decline in the first half of 2020. He said the company will have to face the difficult comparable of 30% iPhone XR price discounts, which were instituted in early 2019.

“We expect Apple to cut iPhone 11 Pro and Pro Max production after the initial ramp in October,” he wrote on Monday. “We think it will be tough for Apple to grow iPhone sales in 2020.”

Apple did not immediately respond to a request for comment on Zhang’s forecast.

Finally, Apple’s large base of iPhone users may be upgrading their iPhones earlier in each cycle. That could lead to lackluster sales later after the initial wave of pent-up demand.

Apple is scheduled to report its fiscal fourth-quarter results on Oct. 30. Wall Street is increasingly optimistic, and iPhone sales could impress for the quarter. But it’s only part of the story. It will take a good bit longer to gauge the true success of the iPhone 11.

Write to Tae Kim at tae.kim@barrons.com

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