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Apple Reportedly Battles Low Demand, Cuts Production Orders

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The iPhone propelled Apple (AAPL - Free Report) into a $1 trillion behemoth but its flagship product’s days of massive unit growth finally appear to be over.

According to a latest Wall Street Journal report, Apple has lowered production orders for all the three recently released models this September. Notably, production orders for iPhone XR have been cut twice since its release in October this year.

Productions Cuts and Low Demand for iPhones to Hurt Apple

Lower-than-expected demand for iPhones coupled with Apple’s decision to introduce more models has made it difficult for the company to predict the number of components and phones needed to be produced.

Also, higher average selling price (ASP) might hurt iPhone sales, especially during low demand. Moreover, in terms of shipment, Apple has lost its position to Huawei, which became the second largest smartphone seller, per the latest data from research firm Gartner. Notably, South Korean handset maker Samsung retained its top ranking in second-quarter 2018.

Further, Apple’s soft sales forecast of $89 billion to $93 billion for first-quarter fiscal 2019, reflects weak iPhone sales in the future, which is worrisome.

Notably, shares of Apple decreased 3.96% to close at $185.86 on Nov 19. Year to date, the company has gained 14.4% in line with the industry’s growth.

Reducing iPhone Dependence Might Prove Beneficial to Apple

Apple’s Services segment has emerged as its new cash cow. The business posted revenues of $9.981 billion, up 17%in fourth-quarter fiscal 2018.

Apple Music is one of the biggest new growth areas in Services and is already a potent threat to streaming music giant Spotify (SPOT - Free Report) in the U.S. market. Additionally, Apple Pay’s transaction volume tripled year over year generating more mobile transactions than PayPal (PYPL - Free Report) in last reported quarter. Further, Apple Pay cash is currently the top-ranked mobile peer-to-peer service, according to Consumer Reports.

Also, Apple has been on a spending spree to scoop up original TV and film content for supporting its streaming service launch and reducing its iPhone dependence. In 2018, the company planned to spend $1 billion on original programming and is expected to spend $4.2 billion by 2022.

Apple Inc. Revenue (TTM)

Apple Inc. Revenue (TTM) | Apple Inc. Quote

These apart, Apple is continuously focusing on acquiring/partnering with Oscar winning content makers to create a place for itself. In this regard, its recent deal with A24 is worth mentioning. This transaction showcases how the company is targeting unique and appealing content in the age of big deals with top stars to draw audiences.

However, competition is stiff in the streaming space. Netflix (NFLX - Free Report) , the dominant player, intends to spend $13 billion on content in 2018. Other big names such as Amazon (AMZN - Free Report) , Disney, Walmart and AT & T with their big deals and unique content offerings are potential threats.

Nevertheless, Apple can get a running start if it is willing to provide its streaming service for free to the current Apple users, at least in the beginning. Moreover, given the cash cushion the company has as compared with some of its streaming peers coupled with its family-friendly content is expected to give it a significant advantage.

Apple currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks Rank #1 (Strong Buy) stocks here.

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