updated 07:00 pm EST, Mon January 14, 2013
More likely that cuts come from yield improvement, say analysts
[Update: New York Times sets the record straighter] An unverified rumor reprinted in The Wall Street Journal and repeated by other media outlets of Apple cutting orders on the iPhone 5, which briefly sent the stock below $500 is likely misleading, say two leading Wall Street analysts, and at best the result of misinterpretation of supplier reports. Both Maynard Um of Wells Fargo and Mark Moskowitz of JP Morgan believe the reports are little more than "noise" designed to manipulate investors and the market.
Unverified stories are often planted by rivals or investors seeking to manipulate a given stock in one direction or another, particularly since it is possible to profit on a stock by driving it to a lower price (and then buying) or by waiting for it to rise and selling when it has appeared to reach a peak. AAPL's now four-month slow decline from its high of just over $700 was in part driven by investors "cashing out" after an extraordinary run-up in the price, along with (likely inaccurate) stories that Apple's holiday quarter may not have been as big as last year's.
While the latest rumor may or may not be true, it has definitely impacted the stock, AAPL closed the day at $501.75, down $18.55 after a late rally that saw the stock briefly dip below $500 for the first time in nearly a year. At the time of this writing, it is up to $502.80 in after-hours trading.
[Update] The New York Times, in a later report, was able to find a specific, named source for the rumor, and discovered that the original story had been exaggerated. The NYT says that orders were indeed cut, but much more modestly than reported -- not "halved" -- from perhaps as high as 19 million to around 12-14 million. The revised numbers give support to those who say the story has been overblown.
The alleged cuts have also sparked a rumor that Apple may be planning to introduce an interim newer model of iPhone -- which, if tradition is followed, would be called the iPhone 5S -- much earlier than expected, possibly in the spring to compete against a new round of Android flagship phones such as the forthcoming Samsung Galaxy S IV. Unlike the months prior to the official arrival of the iPhone 5, however, no credible "iPhone 5S" prototypes or part mock-ups have yet been seen.
JP Morgan's Moskowitz believes that any order cuts may in fact reflect a significant improvement in manufacturing yields, reports AppleInsider -- causing the company to no longer have to "over-order" parts in order to get the quality of yield it requires. If that turns out to be true, the gross margins for the iPhone could significantly improve over the next quarter -- which would likely send the stock rising again.
Moskowitz is quoted as saying that "in our view, the potential order cuts are a direct result of manufacturing yields improving following the fast-and-furious product roll-outs of the iPhone 5 as well as new iPads and Macs." Apple's rollout of the iPhone 5 was considerably more global and more aggressive than previous iPhone launches, which has made it very difficult for analysts to ascertain how many have actually been sold. They have tended to rely heavily on leaked reports from suppliers, who often have only one portion of the overall picture to go by.
Furthermore, it would not be at all unusual for Apple to reduce part orders in an effort to cut inventory in its fiscal second quarter: in fact, such a move is routine. The months of January through March are not the peak buying season that October through December are -- for example, in 2009 and 2010 Apple sold fewer iPhones in its fiscal Q2 than in the holiday season Q1. It sold dramatically fewer iPhone 5 units in fiscal Q2 2012 compared to the holiday Q1 2012 (October-Dec 2011) -- 35 million compared to over 37 million the quarter before.
Given the general historical pattern based on new models released late in the year, Apple likely expects to see fewer iPhone 5 sales in fiscal Q2 than the quarter before it, which could also explain the alleged cuts in parts orders. While Q1 sales numbers will be revealed on January 24, consensus among analysts places the number at just over 50 million, and Wells Fargo's Maynard Um predicts that Q2 will be a lower figure of around 43 million units.
Some initial reports from Japanese sources had claimed that Apple had ordered parts for as many as 65 million units in the March quarter, but that may be representative of over-ordering to ensure supply despite lower yields (the WSJ has since removed the Nikkei citation from its story). Foxconn and other partners have previously complained that the iPhone 5 is significantly more complex to manufacture than previous models, and Apple warned investors previously that the iPhone 5 would have slightly lower margins than previous models due to the complexity.