iPhone XS Could Be Outsold By Edge-To-Edge LCD Model: Analyst

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Analysts now generally expect Apple to reveal three new iPhone models this year, and as is typical, we’re getting more and more of the pieces of what to expect as time goes on. The iPhone X turned out to be a disappointment to analysts despite its OLED display, but despite that, Apple is rumored to be planning two OLED-equipped models, which many are referring to as the iPhone XS and iPhone XS Plus, and one LCD model this fall. Apparently, Apple’s supply chain is expecting the LCD model to outsell the iPhone XS and possibly the iPhone XS Plus as well.

Increasing mix of LCD iPhones

Bank of America Merrill Lynch analyst Wamsi Mohan said he has increased the number of LCD-equipped iPhones in his model for Apple stock following his recent trip to Asia. He is expecting a new 6.5-inch iPhone XS Plus with OLED display, an updated 5.8-inch iPhone XS with OLED display, and a new 6.1-inch LCD iPhone with an edge-to-edge display.

According to Mohan, Apple’s supply chain is cautious on the iPhone XS and XS Plus because of the disappointing sales of the iPhone X, which came with a higher price tag attached to the OLED display. However, suppliers predict that the edge-to-edge LCD model will be “a winner,” so he’s increasing the mix of LCD units and lowering the number of OLED models in his model. He also maintained his Buy rating and $220 price objective on Apple stock.

iPhone XS features set against pricing

The BAML analyst expects the features of the iPhone XS lineup to be about the same as those found in the X, although he also notes that increases to the size have proven to drive sales previously. As a result, this could mean that the massive iPhone XS Plus may see increased demand. He expects the LCD model to get Face ID, an edge-to-edge screen without a home button or Force Touch, and possibly a single-lens camera. Interestingly, he also said Apple is working with suppliers on a foldable phone that could double as a tablet with a planned release for 2020.

Mohan sees the biggest wildcard in the iPhone XS cycle as being the price tag, which proved to be a sticking point with the iPhone X. He pegs the iPhone XS price at about $50 cheaper than the iPhone X and the iPhone XS Plus price at about $50 more than the iPhone X. He also expects $150 to be slashed off the iPhone X price, although he also sees a possibility that the phone may be discontinued altogether. He expects the new LCD model to start at $799, which is the same price the iPhone 8 Plus started at.

Higher LCD iPhone mix may pressure margins, but Apple services to the rescue

Of course, if Apple sells more iPhones with a lower price, it means pressure to the company’s margins, but Morgan Stanley analyst Katy Huberty has a solution for that. She focused on the services business in her Apple stock report this week, which many Apple perma-bulls have been doing for a while.

She noted that there are already plenty of Apple devices in use now, so the next natural area of growth should be the services business, especially as replacement cycles continue to extend, slowing growth in the installed base to the single digits. Despite this slowing device growth, she expects Apple to continue seeing revenue growth in the single digits, but with services as the main growth driver. She predicts that services and other products will spur almost all of the company’s revenue growth over the next five years. Because service revenues tend to have higher margins, growth driven by this segment should boost Apple’s margins.

Huberty also argued that the growth in the services business could drive a higher multiple for Apple stock driven by accelerated expansion in the company’s gross margin. She maintained her Overweight rating and $203 price target for Apple stock.

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