Article: Interpreting ‘Cutting Orders’

Apple’s stock has been less than exciting lately. With months of steady rises, predictions of $1000/share prices or more, and runaway market share in some areas, the last couple of months have been a bit of a disappointment. The stock has dropped from a record high of $700/share in September to around $520/share now. Tonight’s late report from The Wall Street Journal that Apple would cut back on orders for components due to weaker demand.

TechCrunch’s Catherine Shu reported on the story, sharing a concerning quote from being WSJ’s paywall:

“Apple’s orders for iPhone 5 screens for the January-March quarter, for example, have dropped to roughly half of what the company had previously planned to order.”

What does this mean? Is Apple losing its edge? Are Android-based smartphones with larger screens what the public really wants? Although there could be bigger issues at play, let’s take a look at some possible ways to interpret this:

• iPhone 5 sales may actually have slowed because everyone who was due for an upgrade used it in that big rush in September and October. If you recall, there were shortages and that affected the stock, despite 5 million being sold on the first weekend. Nick Wingfield reports for The New York Times:

  Although it’s better for Apple that it appears to be suffering problems of supply rather than demand, both situations result in lost or delayed sales. Analysts who have poked around in Apple’s supply chain believe that the holdup could be the result of a shortage of the new displays that Apple is using in the iPhone 5.

  The company could’ve overcorrected from this shortage and ordered more displays that necessary and now has a stockpile that will last through the next iPhone revision.

• iPhone 5 sales may have been poorer after the initial demand because the iPhone 4 and 4S are selling well. As reported by Neil Hughes for AppleInsider just over a month ago:

  While the iPhone 5 is Apple’s top selling model, as expected, [Canaccord Genuity Michael] Walkley’s checks also found that sales of the legacy iPhone 4S and iPhone 4 models have also been strong. In particular, he discovered that the iPhone 4 — which is available for free with a new two-year service contract — was sold out at many stores.

  At $99 on contract, the iPhone 4S represents a “good enough” alternative to the iPhone 5, especially when looking at simple specifications (8MP camera, 16GB storage, “4G”). Although Apple doesn’t release specific breakdowns of model sales, I could see the 4S being Apple’s strong seller. My anecdotal evidence matches Walkley’s report—quite a few AT&T stores and the Apple Store in my area couldn’t keep them in stock throughout December.

• Apple may be shifting suppliers. One of Apple’s suppliers is LG—they make competing products. Apple may be trying to avoid potential future Samsung-like issues, as LG makes the Nexus 4, arguably a flagship Android product.

• Apple may be slowing down iPhone 5 production to prepare for the next iPhone. I’m not sold on this idea, since the iPhone 5’s replacement would most likely keep the same display size.

• Apple has lost its mojo, and the iPhone will decline in popularity and go the route of BlackBerry. I’m not sold on this either, especially with the strong ecosystem and it serving as a great companion for the selling-strong iPad.

This cut back in orders could be a cause for concern, but it also could be business-as-usual. The only difference is that Apple is under everyone’s microscope these days. Just like rumors of new Macs or iPods in the past would affect the stock price, so do these reports, especially when picked up by publications like The Wall Street Journal. We’ll just have to wait for the hard numbers when Apple releases its quarterly earnings next week.