2 Reasons for Optimism About iPhone Sales -- and 2 Reasons for Caution

By Markets Fool.com

Wall Street analysts are sharply divided in their expectations for Apple's (NASDAQ: AAPL) recently released iPhone 7 and iPhone 7 Plus. Some are predicting a return to solid iPhone sales growth in the current quarter (Q1 of Apple's fiscal 2017). Others expect iPhone sales to continue declining for now.

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Indeed, there are reasons for optimism as well as reasons for caution regarding Apple's Q1 iPhone sales. However, on balance, the evidence suggests that Apple will report a solid increase in iPhone sales for the quarter ending in December.

Analysts' estimates increase -- but there are plenty of pessimists

A month ago, most analysts had very modest expectations for the iPhone 7 and its larger sibling, the iPhone 7 Plus. After all, iPhone sales have been declining for nearly a year, and the new iPhones don't offer any revolutionary upgrades.

Early demand for the new iPhones has been solid. Image source: Apple.

However, since then, a variety of good news has trickled out. All four big U.S. wireless carriers reported record iPhone pre-orders. Additionally, various supply chain sources have indicated that Apple is raising its iPhone component orders. Finally, the iPhone 7 Plus in particular has a long order backlog.

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As a result, analysts are slowly but surely raising their iPhone unit shipment estimates for Q1. Most of the analysts who have revised their forecasts in recent weeks now expect Apple to sell more iPhones in the current quarter than the 74.8 million it moved in last year's first quarter.

Still, some remain skeptical of Apple's near-term prospects. For example, Barclays analyst Mark Moskowitz recently cut his Q1 iPhone shipment estimate to 67.8 million units. That would represent a nearly 10% year-over-year decline. Moskowitz thinks that after the initial burst of sales to early adopters, iPhone 7 demand could quickly peter out.

Ming-Chi Kuo of KGI Securities -- often lauded as the most accurate Apple analyst -- is also skeptical about iPhone sales. Kuo recently raised his Q1 shipment estimate from his initial forecast of 65 million to a range of 70 million to 75 million, but that still implies that sales will be flat or down year over year.

Two reasons for optimism

So which analysts are right? Two major factors point toward a year-over-year increase in iPhone shipments.

First, Apple's fiscal first quarter has an extra week this year: something that happens once every five or six years. In each of the past two years, Apple has shipped an average of more than 5.7 million iPhones per week during Q1. Thus, the extra week represents a big sales tailwind.

Second, lead times for all iPhone models remain significant, three weeks after the new iPhones went on sale. Apple's online store is quoting a two to three week wait for most iPhone 7 configurations. For the iPhone 7 Plus, it's an even longer wait, topping out at six to eight weeks for the new Jet Black finish.

Additionally, as of a week ago, U.S. Apple Store locations still had virtually no availability of the iPhone 7 Plus for walk-in purchases. In China, retail availability is scarce even for the regular iPhone 7.

The iPhone 7 Plus is out of stock at most retail outlets. Image source: Apple.

The apparent shortage of iPhones and the reported increases in Apple's component orders point to a strong demand environment. That bodes well for sales this quarter.

Two reasons why growth could remain elusive

However, there are two reasons why long lead times and the extra sales week might not translate into a big sales gain.

First, Apple significantly increased its iPhone channel inventory last fall, boosting shipments. It then had to undergo a painful inventory correction over the next two quarters. To avoid a repeat of that scenario, Apple may look to exit the current quarter with a lower level of channel inventory, weighing on Q1 iPhone shipments.

Second, low supply may be the main reason why retail stocks are low and online lead times are long. iPhone 7 Plus adoption is running at a similar rate to last year's iPhone 6s Plus, but iPhone 7 adoption has been noticeably slower relative to the iPhone 6s, according to Fiksu.

Whether due to manufacturing hiccups or a deliberate plan by Apple to build fewer iPhones this fall, fewer devices are getting into users' hands relative to the last two iPhone product cycles. iPhone demand is clearly greater than supply right now, but that doesn't necessarily mean it is high enough to drive year-over-year sales growth.

A return to growth is the more likely outcome

It's important to recognize that low supply could be making iPhone demand appear stronger than it really is. That said, iPhone sales aren't running that far behind last year's pace, while wait times seem to be longer.

Apple showed two years ago that it can rapidly increase production if demand is better than expected. That process has already begun. With production rising and an extra week of sales, it would be very surprising if Apple doesn't return to iPhone sales growth this quarter.

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Adam Levine-Weinberg is long January 2017 $85 calls on Apple and short January 2017 $110 calls on Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool is long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.