Since Apple (NASDAQ: AAPL) revealed its new iPhone lineup back in September, it has been clear that the company's holiday-quarter performance would depend greatly upon supply and demand for the pricey iPhone X. Initially, many investors were worried about severe supply constraints for Apple's most ambitious phone yet. Others were afraid that the iPhone X's starting price of $999 would sharply limit demand.
The latter concern was quickly laid to rest after Apple saw massive pre-order demand for the iPhone X in late October. The supply concerns also began to fade after Apple provided strong guidance for the first quarter of fiscal 2018.
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Recent iPhone X usage data indicates that supply is improving very rapidly -- perhaps even faster than Apple had expected. As a result, Apple's forecast from a few weeks ago may turn out to be overly conservative.
Apple calls for a strong holiday quarter
Apple's first-quarter guidance calls for revenue of $84 billion-$87 billion, up from $78.4 billion a year ago. This projected sales growth is particularly impressive because there was an extra week in Apple's first fiscal quarter last year.
To some extent, the bullish guidance reflects the growing traction of Apple's other products (i.e. excluding the iPhone). That said, the iPhone accounted for nearly 70% of Apple's revenue in the year-ago period, so the company's strong revenue guidance almost certainly implies an uptick in iPhone sales.
iPhone X supply is improving quickly
In a hopeful sign for Apple shareholders, iPhone X supply seems to be improving rapidly. When Apple began taking pre-orders late last month, projected wait times for orders through its online store quickly reached five to six weeks. That implied a delivery date in early December.
Apple has steadily reduced the lead time for iPhone X online orders. Earlier this week, the wait dropped to a very reasonable one to two weeks -- which still implied a delivery date in early December! As of Friday morning, Apple was promising delivery between December 8 and December 15 for orders placed through its online store.
One potential explanation for the massive improvement in lead times is that iPhone X demand fell off a cliff after the Apple fanatics placed their pre-orders in late October. The other potential explanation is that output has increased dramatically.
iPhone usage data from Mixpanel supports the latter explanation. Over the past week or so, iPhone X adoption has been increasing about 50% faster than it did during the second week of November. This suggests that output has increased by at least 50% in the past few weeks.
In fact, iPhone X usage has already overtaken that of the iPhone 8 and has been gaining ground on the iPhone 8 Plus quickly. If production continues to ramp up over the next few weeks, Apple could plausibly ship about 40 million iPhone X units by quarter-end. Considering the iPhone X's high price tag and the fact that other iPhone models are still selling at a decent clip, this could power Apple well past its own sales forecast.
Echoes of the iPhone 6
The strong customer response to the iPhone X is reminiscent of the iPhone 6/iPhone 6 Plus launch three years ago. That year, Apple's revenue forecast for the holiday quarter was $63.5 billion-$66.5 billion, which would have represented a 10%-15% year-over-year increase. In the end, Apple generated record revenue of $74.6 billion, 12% above the high end of its guidance.
This stellar result was driven by blowout sales of the iPhone 6 and iPhone 6 Plus. iPhone unit sales soared 46% year over year, while iPhone revenue jumped 57%.
The key takeaway is that when a new iPhone model is a big hit, Apple usually figures out a way to ramp up production quickly. As a result, when supply constraints are the main barrier to sales, Apple can soar past expectations.
Right now, Wall Street analysts' first-quarter revenue estimates for Apple range from $84.0 billion to $87.6 billion. It's certainly possible that Apple's revenue will fall in that range. Still, analysts are underestimating the likelihood of an iPhone 6-like blowout, with revenue surging well past Apple's forecast. If iPhone X supply continues to improve, Apple could easily surpass $90 billion of revenue this quarter, powering its earnings far beyond Wall Street's expectations.
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