Apple Inc. iPhone 7 Sales: Don't Be Misled

By Markets

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Image source: Apple.

Apple (NASDAQ: AAPL) has a lot riding on its recently released iPhone 7 smartphones. The company's iPhone product category is by far its most important, and after seeing year-over-year shipment and revenue declines during the iPhone 6S cycle, the company needs the iPhone 7 to do well.

Interestingly, there have been several reports claiming that Apple's iPhone 7 shipments during the second half of 2016 might actually come in lower than shipments of the iPhone 6S in the prior year.

That might make it seem as though sales of the iPhone 7 are actually worse than what the iPhone 6S was able to deliver last year. However, investors need to realize that this isn't necessarily the case at all. Here's why.

Apple over-shipped last time; Apple seems supply constrained this time

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With the iPhone 6S, Apple likely built and shipped iPhone 6S devices under the assumption that the then-new device would sell better in the marketplace than the prior generation iPhone 6. When it was clear that the end-demand wasn't there, Apple wound up cutting iPhone 6S production and reducing the number of phones that it shipped to its channel/distribution partners.

That channel inventory reduction led to Apple meaningfully reducing its own iPhone 6S shipments during the first half of this year.

The initial build plans around the iPhone 7 were likely informed by Apple's experience with the peak sales of iPhone 6s. It's not surprising, then, that Apple had originally planned to build fewer iPhone 7 units during the second half of 2017 relative to what it built of iPhone 6S units in the second half of 2016.

Those initial build plans don't really say much about end demand.

What is telling, though, is that in light of the reduced builds year over year, Apple doesn't appear to have reached supply-demand equilibrium; instead, many models -- particularly the iPhone 7 Plus models in black and jet black finishes -- are still difficult, if not impossible, to find at Apple retail stores (and shipping times on Apple's online store are very long for these models).

My bet? iPhone 7 will do better than iPhone 6S

Although it's too soon to say for sure, I have a suspicion that the iPhone 7 series of smartphones will do better than the iPhone 6S did when it was Apple's flagship. Not only are the new phones more competitive than their predecessors were in terms of features and component performance, but Apple also has the benefit of many of those iPhone 6 owners (and given how successful this phone was, there were likely a lot of them) potentially being in the market for upgrades.

There's also the fact that Samsung (NASDAQOTH: SSNLF), arguably Apple's toughest competitor, recently canned its Galaxy Note 7 line of smartphones, which would have competed with Apple's iPhone 7 Plus. Some analysts think that Samsung's stumbles here could lead to unit shipment upside for Apple, though that remains to be seen.

The iPhone 7 seems like it is good enough to allow Apple to do well over the next year while the company prepares what it widely expected to be a "revolutionary" next-generation iPhone 8.

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Ashraf Eassa has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: 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.