AAPL - iPhone 8 & 8 Plus Have Tepid Pre-order Sales

AAPL Will Rely On iPhone X & China

The Nasdaq was the only index that was negative on Wednesday. It was down because Apple pulled it lower. AAPL was down 1.68% on Wednesday; it is down 4.86% from its all-time closing high on September 1st. There were a few catalysts that pushed it lower. The first is the one we’ve discussed previously; traders like to buy the rumor and sell the news. The other problem is weak pre-order numbers for the iPhone 8 and 8 Plus.

Personally, I have a hunch that most of the customers will be buying the iPhone X because of the larger screen, new design, and face recognition software. Apple customers love to show off their new devices. Given the iPhone X overhang, it’s not surprising the iPhone 8 and 8 Plus sales were weak. It’s possible to make the conclusion that weak sales results are good news because that means the iPhone X will get a large percentage of the crowd looking to upgrade devices. We won’t know how great pre-order sales for the iPhone X will be until late October. The means the negative reviews and tepid demand could be a buying opportunity forAAPL in the next few weeks.

The other issue AAPL stock is facing is the Apple Watch is having connectivity issues. Sometimes weak Wi-Fi networks are preventing it from getting a signal using LTE. Apple said this will be resolved soon. This isn’t good news, but the Apple Watch is still a small portion of the business, so AAPL stock won’t be too affected by this in the long run. Apple has failed to find a device to replace the iPhone in terms of profitability. That’s the biggest issue for the company. Luckily, it looks like iPhone X will probably be the company’s savior for the next year.

The chart below shows the growth in iPhone profits broken down between average selling price changes and unit growth/declines. As you can see, the iPhone unit growth actually improves when the price goes up. You’d think it would be the reverse. One explanation for this is selling prices go up when better products come out. The more advanced the product, the more purchases. The biggest example of a price increase is when the iPhone Plus model came out. Adding a more expensive model improved selling prices obviously. Adding another model with a bigger screen size also boosted total unit sales growth. The same thing is expected to happen in 2018 for the iPhone X. The iPhone X is the holy grail because it will boost unit growth and the average selling price.

Another area which isn’t getting much attention from the media is the fact that fast charging is going to cause buyers of all 3 new models to pay $84 in dongles. Fast charging enables a 50% charge in 30 minutes. The only way around this is if 3rd part adapters come out. Even if that’s the case, many more dongles will be sold which will boost AAPL’s bottom line.

The final information we’ll look at for the iPhone is the upgradeable base. With the new way wireless service companies have started charging customers, getting rid of the 2-year contract, the propensity to upgrade could start to fade. However, people still have FOMO when it comes to getting new devices. There’s also the fact that batteries on devices tend to fade quickly after 2 years of use; this motivates people to buy a new device. The chart below breaks down the upgradeable base for the iPhone in various countries/regions. As you can see, China has the most potential. The question is if Chinese consumers like the new devices. That will make or break AAPL’s 2018.

Graham-Cassidy

The news cycle is starting to pick up with regards to the latest GOP attempt to repeal Obamacare. It’s clear that Mitch McConnell will put the vote to the floor next week. This likelihood is probably why the plan now has a 24% chance of passing on PredictIt which is a betting website. As I previously said, Murkowski, the Senator from Alaska, is the key vote to determine if it will pass.  Murkowski said the following: “I have asked for nothing except the data that we’re going to need to better understand the impact to a high-cost, low-density state like Alaska.” She said she was looking for the numbers from the Centers for Medicare and Medicaid Services and the Department of Health and Human Services by “working with our state’s Medicaid directors.” That quote tells us the chance of it passing is up in the air.

One new issue which has been discussed about the bill recently is that the repeal will give states the ability to repeal protections for patients with pre-existing conditions. The bill makes the states tell the federal government how they will provide adequate and affordable coverage to those with pre-existing conditions. However, the devil is in the details as far as what adequate and affordable mean. It has been said that the secretary of HHS will determine what that means which implies he can unilaterally end the pre-existing conditions clause. The good news for the plan’s chances of passing is that the CBO won’t have time to score the bill. Whenever the CBO scores these bills it shows how many people will lose healthcare coverage which causes its popularity to plummet in the polls.

Conclusion

In the next 4-7 days, we will know if the Senate will pass the Graham-Cassidy Obamacare repeal bill. As of now, I will say it’s unlikely the bill will pass. If the Senate is able to convince Murkowski to vote for it by giving her state extra money, then I would estimate the chances of it becoming law will be above 50%. At that point, the House will take it up. It won’t be able to change the law. Given the fact that the House already passed a bill, you’d expect the House to pass this one. It will be close, with many House Freedom Caucus members dissenting.

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