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Apple's New iPhone XR Expected to Dominate Sales

Evan Niu, CFA, The Motley Fool

If anything, the iPhone XR that Apple (NASDAQ: AAPL) unveiled last week might be too good. At 25% less than the price of an iPhone XS but with a very comparable feature set, the iPhone XR could potentially cannibalize the iPhone XS. That's not the worst thing that could happen, and Apple doesn't care when it cannibalizes itself, but the iPhone XR's likely popularity could undermine the upside that the Mac maker is hoping to enjoy in average selling prices (ASPs) over the coming year.

At least one analyst is expecting the iPhone XR to dominate sales.

White iPhone XR

iPhone XR. Image source: Apple.

iPhone XR will be the volume driver

Widely followed Apple analyst Ming-Chi Kuo put out a research note over the weekend (via MacRumors and 9to5Mac), and Kuo is modeling for Apple to ship 75 million to 80 million units of the new iPhone models in what's left of 2018. For reference, the company shipped 77.3 million iPhones in the fourth quarter of last year. While the iPhone XR is being delayed until October due to supply constraints related to the 6.1-inch LCD display panel, Kuo still expects that the XR will comprise 55% to 60% of unit sales of the new models, representing the majority of unit volumes for 2018 iPhones.

In terms of the other models, the analyst believes that XS demand is relatively soft, potentially because its improvements compared to last year's iPhone X are negligible. Kuo has reduced his expectations for XS in the product mix, and now believes it will represent just 10% to 15% of volumes for the refreshed lineup (down from his prior estimate of 15% to 20%). iPhone XS Max is off to a strong start, particularly in the Chinese market since it now comes in gold, has a larger display, and supports dual SIMs. The larger model is expected to comprise 30% of units.

CEO Tim Cook has noted how over the past year, iPhone X has been both the most popular and most expensive model, which was the first time that had occurred for a product cycle. It seems that this for coming year, the most popular model may be the most affordable model.

What about profitability?

While the implications on ASPs are more straightforward, what's less clear is how stronger-than-expected demand for iPhone XR could affect profitability. Newly designed models always start at the height of the cost curve, which includes all of the new manufacturing infrastructure that Apple has to install.

LCD displays are undoubtedly cheaper than OLED panels by a large margin, which is partially how Apple can sell the new handset for $750, but there could be added costs associated with Apple's custom specifications. For example, Apple is having its LCD manufacturers customize the panel shape in order to accommodate the notch, which houses the TrueDepth camera system.

Investors will have to wait until the next earnings release in October or November to get more detail from management about how the margin profile may have changed.

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Evan Niu, CFA owns shares of Apple. 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.