Apple's iPhone XS Is Stuck Between a Rock and a Hard Place

Last year, Apple (NASDAQ: AAPL) released not two but three new iPhones: iPhone 8, iPhone 8 Plus, and iPhone X. The iPhone X was a particularly interesting device because it represented a radical redesign, while the iPhone 8 and iPhone 8 Plus were relatively straightforward upgrades of the prior generation models.

The iPhone X, though quite pricey at a starting price of $999 for the version with 64 GB of storage, went on to become, in the words of Apple CEO Tim Cook, "the No. 1 smartphone in the world." The relative popularity of the device helped to drive significant year-over-year iPhone average selling price increases over the course of the company's fiscal 2018.

It might come to a surprise to some, then, that the successor to the iPhone X -- known as the iPhone XS -- is reportedly seeing lukewarm reception in the market. According to analyst Jun Zhang with Rosenblatt Securities (via Apple 3.0), "[T]he iPhone XS order pipeline is very weak, resulting in leftover inventory of the iPhone XS."

Let's take a closer look at what's going on.

iPhone XS Max is getting a lot of love

Zhang claimed that "iPhone XS Max sales were about 4-5x iPhone XS sales over the weekend." (Zhang is referring to the first weekend that the iPhone XS and iPhone XS Max were available for purchase.)

The iPhone XS Max is a larger version of the iPhone XS.

He's not the only one claiming something similar, either. TF Securities analyst Ming-Chi Kuo (via MacRumors) wrote that "the demand for XS Max is better than expected (3-4 times that of XS)." The analyst is also "positive that XS Max shipments will grow steadily in 4Q18 thanks to demand from Asia market and the gift season."

The evidence is mounting that the iPhone XS Max is dramatically outselling the standard iPhone XS. While it's clear that the iPhone XS Max is a problem for the iPhone XS, it's not the only problem for the vanilla iPhone XS. (Although Apple enjoys greater revenue and likely gross margin dollars from an iPhone XS Max sale compared to an equivalently configured iPhone XS sale, so customers picking the iPhone XS Max over the iPhone XS is actually a good thing for Apple.)

The iPhone XR problem

While customers choosing an iPhone XS Max over an iPhone XS isn't a problem for Apple (in fact, it merely confirms that premium iPhone buyers increasingly prefer larger screens), customers opting for the company's iPhone XR -- the cheapest of the newly launched models -- would be. And, to be blunt, it looks like that's what could be leading to relatively weak iPhone XS sales.

The iPhone XR, though it has a less advanced liquid crystal display (LCD) relative to the organic light-emitting diode (OLED) screen found on the iPhone XS, has a bigger screen than the latter -- 6.1 inches for the XR versus 5.8 inches for the XS. What this means, then, is that customers that strongly prefer larger screens may view the iPhone XR as a superior product to the iPhone XS.

While Apple has worked to differentiate the iPhone XS from the iPhone XR in several ways, including casing material choice, display resolution, camera features, cellular capabilities, and system memory (Apple doesn't advertise this, but this information is easy enough to come by for those interested), those perks may not be enough to offset the smaller screen and bigger price tag of the iPhone XS.

Customers opting for the iPhone XS Max over the iPhone XS isn't a problem for Apple -- it's a blessing. However, customers not finding enough value to pay $250 more for the iPhone XS over the iPhone XR is.

Apple may adjust strategy

Given that the iPhone XS is shaping up to be the least-popular model in the lineup, my guess is that Apple will adjust its strategy with respect to its premium iPhones in its coming product cycle. As I argued in a previous article, Apple could outfit the successor to the iPhone XS with a similarly sized screen to the one on the iPhone XR (but, of course, with all of the advantages that the current iPhone XS screen enjoys over the iPhone XR screen -- potentially with further enhancements), or it could insert a 6.1-inch OLED model in between the successors to this year's iPhone XS and iPhone XS Max (although this could potentially be messy for Apple).

At any rate, Apple is clearly focused on trying to boost its iPhone average selling prices and losing potential iPhone XS customers to the cheaper iPhone XR probably isn't something that the company is likely to be thrilled about. I look forward to seeing Apple's 2019 iPhone product stack and the impact to iPhone average selling prices that lineup will ultimately have.

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Ashraf Eassa has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.