What would you think if Boeing (BA) couldn't produce any planes because one of its suppliers was severely delayed? Toyota (TM) told you they wouldn't be able to sell you a Camry or Corolla because of the tsunami?
Yet, there is one company in the world where that did happen. It happened this quarter and it happened to Apple (AAPL). You could walk into any Apple retail store (or Verizon or AT&T or Sprint for that matter) looking for an iPhone 5 and walk away empty-handed. Not for just a day, but month after month. For most of the quarter, you were just as likely to find a Samsung III S Galaxy in your local Apple store as an iPhone 5. On-line sales weren't much better - waits were at 3 to 4 weeks as Apple struggled to get supply.
It's only within the past week that you can walk into an Apple store and walk out with an iPhone 5.
Incredibly, Apple is still the world's most valuable company despite being out of its premier product - the iPhone 5 - for most of October and November. Doesn't make much sense to me. When you didn't have your key product on the shelves for most of the quarter, how do you make the numbers? It wasn't because iPhones were flying off the shelves. Apple had major supply issues - its manufacturer, Hon Hai, couldn't get enough off the assembly line.
In less than 30 days, Apple closes its December quarter. I'm predicting Apple will miss the estimates. Consensus estimates are $13.32, not much less than the year-ago quarter's $13.87. Yet, the iPhone 5 was out of stock for much of the quarter.
IPhone sales form the bulk of Apple's revenue and profits, contributing over 50% of sales and over 60% of profits. This time Apple is going to come up short on weak iPhone numbers. Even a great December won't make up for all of the lost October and November sales. In fact, those transactions probably went to Samsung (OTC:SSNLF), a company that did have its hot smartphones in stock.
That's what happens when you don't control production. This is Apple's Achilles heel. Apple outsources all of its manufacturing. This year Apple sold 237 million iProducts - everyone of them was built by some other company. All of the components that went into its products were made by somebody else. In fact, Apple often relies on single-source suppliers. The orchestration required is dizzying. In the end, Apple must rely on other companies' seamless production. As Apple warns in its most recent 10K:
Substantially all of the Company's hardware products are manufactured by outsourcing partners that are located primarily in Asia. A significant concentration of this manufacturing is currently performed by a small number of outsourcing partners, often in single locations. Certain of these outsourcing partners are the sole-sourced suppliers of components and manufacturers for many of the Company's products. Although the Company works closely with its outsourcing partners on manufacturing schedules, the Company's operating results could be adversely affected if its outsourcing partners were unable to meet their production commitments.
This is unlikely to be the last of Apple's supply snafus. We've already seen Mini Pad production difficulties mirroring the problems Apple had with its iPhone 5.
Wall Street expects sensational numbers from its most valuable company. The Street is looking for $192 billion in sales for 2013, 23% more than last year. This year Apple has to get more product out if it is going to hit that number. We may be approaching a manufacturing limit as Apple's partners try to get two-thirds of a million product out the door every day (237 million devices sold last year/365 days).
The market may be in for a nasty surprise when Apple reports its quarter. Apple has to make enough money to justify a $500 billion market cap. It missed estimates the last 2 quarters. It is likely to miss them again.
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