iPhone 7 Plus Supply Is Finally Improving -- Slowly

By Markets Fool.com

Since launching its latest generation of iPhones two months ago, Apple (NASDAQ: AAPL) has seen solid but not spectacular demand for the smaller iPhone 7. Adoption has been somewhat slower than for the iPhone 6s, but not dramatically so. iPhone 7 shipments have probably peaked already, according to respected Apple analyst Ming-Chi Kuo.

Continue Reading Below

By contrast, iPhone 7 Plus demand has been off the charts, catching Apple off guard. The iPhone maker has been working hard to ramp up iPhone 7 Plus production. These efforts are starting to yield results, but Apple still has a long way to go to meet demand during the key holiday season.

iPhone 7 Plus demand still exceeds supply by a wide margin. Image source: The Motley Fool.

Supply shortages are common

It's not unusual for Apple to face long-running supply shortages for its most popular products. For example, in late 2014, iPhone 6 and iPhone 6 Plus demand significantly outpaced Apple's expectations. In the U.S. Apple's online store was quoting a wait of three to four weeks for the iPhone 6 Plus as late as mid-November.

Apple ultimately sold 74.5 million iPhones during that quarter, up a stunning 46% year over year. It did so despite supply lagging demand right through the end of the quarter.

Continue Reading Below

For the iPhone 7 Plus, 2016 is shaping up to be a repeat of 2014. On Apple's earnings call last month, CEO Tim Cook candidly told analysts that he wasn't sure Apple would be able to meet all of the demand for the iPhone 7 Plus by year-end.

To some extent, conservatism in Apple's initial planning may be to blame for the iPhone 7 Plus shortage. Earlier this year, Apple ended up with too much iPhone inventory. In trying to avoid a repeat of that problem, it may have gone too far in the other direction. However, the recall and discontinuation of Samsung's competing Galaxy Note 7 has probably also boosted iPhone 7 Plus demand.

The Samsung Galaxy Note 7's demise may be boosting iPhone 7 Plus demand. Image source: Apple.

Adoption rises steadily

Since the iPhone 7 Plus went on sale two months ago, adoption has been rising steadily. During the first month of availability, iPhone 7 Plus sales easily outpaced the sales pace set by the iPhone 6s Plus and iPhone 6 Plus in the last two years.

If anything, the second month of sales was even better. iPhone 7 Plus adoption has sped up somewhat in the last month, according to both Fiksu and Mixpanel.

The change is small enough that it could just be the result of measurement error. Nevertheless, the evidence suggests that Apple's attempts to increase iPhone production are working. For the iPhone 7, supply has more or less caught up to demand, with good availability both in stores and online. For the iPhone 7 Plus, both the weekly sales rate and retail inventories appear to be rising modestly.

A massive iPhone 7 Plus backlog remains

Despite some improvements in the past month, iPhone 7 Plus demand still outstrips supply by a wide margin. As of the middle of this week, Apple was still quoting a three- to four-week wait for all iPhone 7 Plus models in its online store. It has since reduced that estimate to two to three weeks. This is almost exactly the same timing as 2014, when the iPhone 6 Plus lead time was quoted as three to four weeks until the week before Thanksgiving.

Meanwhile, retail availability appears to be very thin, at least at the Apple Store. A handful of U.S. Apple Stores didn't have a single iPhone 7 Plus in stock as of Friday morning. In general, most Apple Stores are out of stock on most iPhone 7 Plus configurations, especially for the more popular wireless carriers.

Will supply catch up to demand by year-end?

With less than a week left to Black Friday, iPhone 7 Plus retail inventories are still thin and the wait time for online orders remains quite long. This looks very similar to the situation two years ago, when Apple couldn't fully meet demand during the holiday quarter but caught up during January.

Two years ago, iPhone 6 supply didn't catch up to demand until January. Image source: Apple.

One potential wrinkle is that several major U.S. retailers are including the iPhone 7 Plus in their Black Friday promotions. For example, both Target and Best Buy are offering $250 gift cards with the purchase of an iPhone 7 or iPhone 7 Plus on an installment billing program.

Perhaps these third-party retailers have secured more of Apple's scarce iPhone 7 Plus shipments recently to support their Black Friday marketing plans. If so, it's possible that supply at the Apple Store could quickly improve in late November and early December. However, even if that's true, Apple will have to race to catch up to demand by the end of the quarter.

Apple is clearly benefiting from strong iPhone 7 Plus demand. This should bolster its gross margin, as well as the iPhone average selling price. But it's still a toss-up as to whether Apple will reap the full benefit this quarter or if some sales will be pushed into January.

10 stocks we like better than Apple
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and Apple wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of November 7, 2016

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.