New Zealand Markets close in 4 hrs 57 mins

Is Apple's New Lower-Priced Smartphone Its Secret Weapon?

Danny Vena, The Motley Fool

Fresh off its $1 trillion market cap, Apple (NASDAQ: AAPL) held its annual product reveal last month. The company released a new flagship iPhone -- the XS (read 10 S) -- as well as a larger version of its top-of-the-line model, the XS Max. The devices had a number of pricing options starting at $999 and climbing as high as $1,449, depending on the model and amount of memory chosen. 

One of the more surprising revelations from the event was the introduction of the iPhone XR. The lower-cost device contains a surprisingly robust set of features and carries a price tag 25% lower than the XS model. Many have noted that the XR could potentially cannibalize sales of the higher-priced models as consumers look for more cost-effective iPhone options from Apple.

Now, a renowned Apple follower is signaling that demand for the device could be much better than initially expected.

Apple executive Phil Schiller talking on stage with the iPhone XR projected on a screen behind him.

Apple executive Phil Schiller debuts the iPhone XR. Image source: Apple.

The analyst

Noted analyst Ming-Chi Kuo, with TF International Securities, is known for his impressive track record regarding Apple product predictions. His insight into the company is the result of his close industry relationships and strong ties with many of the companies in Apple's supply chain.

Earlier this week, Kuo increased his estimates for the calendar fourth quarter (which is Apple's fiscal first quarter). The analyst now believes iPhone shipments will top out between 78 million and 83 million, up from a prior estimate of 75 million to 80 million. This would result in an increase of 4% at the midpoint compared to the 77.3 million iPhones Apple sold in the prior-year quarter. 

What's driving this newfound enthusiasm for iPhone shipments? Apple's low-cost option, the iPhone XR.

Much greater potential

Kuo believes that Apple will ship between 36 million and 38 million units of the XR, a 10% increase from his previous estimate of 33 million to 35 million units. These higher shipments will be the result of not only strong replacement demand, but also an improved supply, which was expected to ramp up in early October.

The noted Apple-watcher says the "larger display, longer battery life, dual SIM-support, and new form factor design," will lead to increased demand for the XR, especially in light of its lower cost. With a starting price of $749 for the XR -- compared to a base cost of $999 for the XS -- Kuo is forecasting a more robust product cycle for Apple than occurred with the iPhone 8 and 8 Plus last year. 

That isn't all. Kuo is forecasting overall shipments in the first three months of 2019 (Apple's fiscal second quarter) will "beat low seasonality" and grow 10% year over year to a range of 55 million to 60 million devices, driven by increasing demand for the XR. This would represent an increase of between 5% and 15% compared to the 52.2 million iPhones Apple sold during the same period last year. 

Apple CEO Time Cook and design chief Jony Ive check out iPhone XR.

Apple CEO Tim Cook and design chief Jony Ive check out the iPhone XR. Image source: Apple.

The bottom line

For consumers on a budget, the iPhone XR represents a viable alternative to more pricey options and offers a reasonable compromise on features. The device contains a more affordable LCD display compared to the top-of-the-line OLED on the XS, and the XR hasn't been outfitted with Apple's latest dual-camera technology. The device does have the A12 bionic chip, Face ID, and an edge-to-edge screen boasted by more expensive models.

It's also worth noting that Apple will probably see the average selling price (ASP) grow from the record-setting $796 and $728 Apple achieved in the fiscal first and second quarter of 2018, respectively. With iPhone prices topping out at $1,449 and heavy demand expected for the $749 XR, expect the company to achieve a new high watermark for ASP, as well as new sales records in the quarters to come.

More From The Motley Fool

Danny Vena 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.