There has been a lot of negative hype concerning the iPhone 5 this holiday season. Rumors have ranged from weak demand to supplier component shortages to orders being cut. Taken together, these rumors have played a role in collapsing the stock price of Apple (AAPL) from over $700 in September to barely over $500 currently, as people fear AAPL estimates will come up short vs. last year. All of this fear is based on nonsense. Here's why:
1. "Orders Cut, Oh No!" -- We've Seen This Movie Before
Why are people, including analysts, worried about rumors of orders being cut? AAPL's 10-K specifically states:
In the company's experience, the actual amount of product backlog at any particular time is not a meaningful indication of its future business prospects. In particular, backlog often increases in anticipation of or immediately following new product introductions as customers anticipate shortages. Backlog is often reduced once customers believe they can obtain sufficient supply. Because of the foregoing, backlog should not be considered a reliable indicator of the Company's ability to achieve any particular level of revenue or financial performance. (emphasis added)
This report about the iPhone 4S last year, which turned out to be utterly unreliable as a predictor of the quarter, sounds eerily similar to the reports on the iPhone 5:
Apple Inc. may be cutting back on orders of components and parts for its latest iPhone 4S, due to weaker demand and shortages in the supply chain. ... Apple could even cut its shipments of both iPhones and iPads from suppliers by as much as 10%-15% in the fourth quarter, as strong pre-sale figures taper off.
Then reality hit. AAPL beat the sales estimates of even the most bullish of bulls, with $46.33 billion in revenues vs. $38.91 estimates led by iPhone units sold of 37.04 million vs. 31 million expected. Analysts, the media, and all of the bears (and even the bulls) were so far off the mark on how well things were going it was scary.
How could all these reports be such an unreliable forecast of 2011 holiday sales?
2011 iPhone 4S:
Now it seems like we're getting iPhone deja vu from the analysts, media, and bears alike. And people are actually falling for it despite the fact that, again, AAPL's 10-K insists it's not a reliable indicator and 2011 proved it. Compare to the 2011 iPhone 4S "warnings" above:
2012's iPhone 5:
"Production Problems With The iPhone 5"
"Apple iPhone 5 Hampered By Component Shortages"
"The Company's Asian Suppliers Have Been Reporting Cuts In Orders, Raising Questions About The iPhone 5's Strength"
It's almost as if virtually every iPhone 5 "concern" is a recycled version of the same unfounded concerns over the iPhone 4S. Makes you wonder if it's much ado about nothing. Again.
2. The China Debate
There's been much debate about how iPhone 5 sales have been going. Shorter lines but more points of sale gives an unclear message. Here's the central point that seems to be missing from the reports: The iPhone 4S wasn't even launched in China until Jan. 14, completely and entirely missing fiscal Q1 2013 ending Dec. 31. So what the hey? There were zero iPhone 4S sales in China this time last year. It's not exactly a tough feat for AAPL to beat the year-ago period in China, especially with 2 million sold in the first three days. The concerns that it's less than expected are ridiculous when compared to the iPhone 4S. Meanwhile, reports are that sales continue to soar in China, whereas a year ago at this time there weren't even any iPhone 4Ss available yet.
3. The Calendar Factor
This year, there's not only an extra two key shopping days of the holiday shopping season (with Black Friday two days earlier than last year), but those two days were an extra Saturday and Sunday. Saturday, Dec. 22 was the second busiest retail shopping day of the year, second only to Black Friday. Since this occurs only once every 28 years, this is the first time since 1984 that the YOY calendar factors in like this year. So many were quick to forecast AAPL coming up short without factoring in this extra "free" weekend of extra sales. This is especially a key edge when you consider the length of time it takes to upgrade a phone between contract signing and transferring the data from the old phone to the new (not to mention both parties must be there if it's a gift), and sales are especially more pronounced on the weekends when people can afford the time (I speak from experience, having bought a new iPhone myself on Saturday). An extra two weekend days might not sound like much at first, but it means 10 weekend shopping days in the holiday season vs. eight last year -- a difference of 25% more.
I exclude Christmas Eve from the statistics, since shopping is generally much lighter that day with stores closing early. Furthermore, due to it occurring on a Monday this year, most people have off from work with reports of stores staying open later than usual on Christmas Eve compared to last year. The Christmas Eve shopping edge would go to this year anyway, so whatever way you slice it, there are more key shopping hours for people to buy iPhones.
AAPL seems like a good buy at these cheap prices. I'm amazed how quickly the Street forgets, with all its pessimism surrounding the iPhone 5, what AAPL spokesperson Nat Kerris said: "We've been completely blown away by the customer response." Which, it turns out, is 20 times faster than the previous generation of 4S, despite the 4S launching closer to the holiday season and likely had less initial production available for sale.
It seems to me that this year the negative iPhone 5 hype mirrors last year's negative iPhone 4S hype -- and it's possibly even worse. There have been a lot of great articles forecasting why AAPL will beat estimates. I believe these three items add some additional compelling overlooked reasons why AAPL might handily beat estimates -- those in AAPL ahead of time at these cheap levels have a good chance of being rewarded.
That said, there are some risks that are important to note. First is the obvious: I could be wrong and the negative media hype is right this time. Second, even if I'm correct and AAPL beats estimates handily, the stock could go down anyway on a negative outlook. Perhaps, as just one example, by the time earnings come out more indication will come forth on the Research In Motion (RIMM) Blackberry 10, and the market may see it as a real risk to stealing substantial market share from the iPhone. In a previous article of mine I mention RIMM and expand a bit on the advantages it which may bring back customers toward RIMM and away from AAPL.
Third, there is growing concern that AAPL has just gotten so big that's it harder to show impressive growth gains as a percentage -- especially as some of its products cannibalize each other (such as the iPad replacing the iMac or the iPhone acting as an iPod, etc.). For instance, for the iPhone 5 alone it has been said it could boost GDP in the fourth quarter by 0.25 to 0.50%. It's going to get extremely tough for AAPL to top its own success in the form of more large growth. Fourth, there is increasing concern about profit margin pressure as newer generations of products are getting more expensive, yet the price in the store is going down (see Wal-Mart slashing the iPhone 5 price as an example).
Finally, the most important and realistic risk is that AAPL may continue to sell off in the near term. Just because a stock will go up with earnings a month from now doesn't necessarily make it a good buy today. There is little doubt that at least some of the media will continue to pound AAPL and the iPhone with negative headlines no matter what reality of the situation is -- and that could continue to mount pressure on the stock before it's ready to rebound. Just because AAPL is cheap today doesn't necessarily mean it won't get even cheaper first.