Reportedly, Apple (AAPL - Free Report) may offer subsidies to major Japanese carriers that are contemplating iPhone XR price cut. Per the Wall Street Journal, as stated by MacRumors, the price cut on iPhone XR device, which costs $750, could come as early as next week.
Apple’s rare move reflects sluggish demand for iPhone XR model in Japan, which is a huge market for the company’s products. Reportedly, older models — iPhone 8 and iPhone 8 Plus — are still quite popular in the country. This has probably overshadowed iPhone XR sales.
Nonetheless, the price cut reflects Apple’s inability to convince existing users to buy new models. This doesn’t offer a rosy picture to the investors. The company is also rumored to restart iPhone X production for specific markets. This again reflects dwindling demand for the company’s new models.
Sluggish New iPhone Demand to Hurt Sales
Shares have nosedived more than 20% following Apple’s announcement that it would no longer provide details about the number of devices it sells, or even how that breaks down between iPhones, iPads, Macs, etc.
Apple has returned 1.1%, underperforming the S&P 500 Composite’s rally of 1.7% in the past year.
Reportedly, Apple has now lowered production orders for all the three models it had released in September. According to the Wall Street Journal, production orders for iPhone XR have been cut twice, since its release in October this year.
Sluggish demand for iPhone 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.
Apple’s soft sales forecast of $89-$93 billion for first-quarter fiscal 2019 reflects weak iPhone unit shipment in the holiday season. The company has been relying on higher average selling price (ASP) to uplift top-line growth. However, sluggish sales of flagship iPhone for a prolonged period can compel the company lower prices that will ultimately hurt profitability.
Suppliers Slashing Forecast
iPhone’s sluggish demand can be attributed to saturated developed markets, weak demand for very high end devices in developing markets (like India) and longer replacement cycles. Moreover, stronger dollar is making Apple products more expensive internationally.
The sluggish demand for iPhone negatively impacted Apple suppliers like Lumentum Holdings (LITE - Free Report) , Qorvo (QRVO - Free Report) , Japan Display and British chipmaker IQE.
Lumentum, which supplies 3D chips used in FaceID architecture, recently lowered its revenue guidance by 17.4% at mid-point levels from $405-$430 million to $335-$355 million, cautioning investors that one of its biggest clients (which could be Apple) have recently reduced the scope of its orders.
Per Bloomberg, Foxconn is planning to cut expenses by 6 billion Yuan in its iPhone business primarily due to lackluster demand. Foxconn, also known as Hon Hai Precision Industry Co., is the biggest assembler of iPhones. The company also plans to eliminate about 10% of non-technical staff, according to an internal memo.
Zacks Rank & A Key Pick
Apple currently has a Zacks Rank #3 (Hold).
Intel (INTC - Free Report) is a stock worth considering in the broader Computer & Technology sector as it flaunts a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Expected long-term earnings growth rate for Intel currently stands at 8.4%.
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