Investors are always dealing with incomplete information when making investment decisions. For example, today's report from the Wall Street Journal that Apple (AAPL) has significantly reduced orders of iPhone 5 screens, and some components for - March quarter seems to be evidence of soft demand for the company's newest smartphone.
The knee-jerk reaction of some investors to this news might be to decide that Apple's run in the smartphone space is over and cash in their shares. Here's the problem:
No one outside of Apple knows why these production cuts were made.
At this point, the only thing that can be done as an investor is to view the production cut information in context to any other information that is available to the market. A few key points to consider:
- Apple took the unprecedented step on refreshing iPad, iPod and iMac lines for the Oct-Dec quarter. This massive product refresh resulted in higher manufacturing costs for Apple, operations headaches and essentially removed all product refreshes for the first half of 2013 for the company. As an operations guy, it is highly unlikely Tim Cook would undertake a refresh of this scale without some strategic motive.
- Larger screen phone's, or phablets, have quickly become a major sector of the smart phone market, especially in developing markets. ABI research estimates over 208 million phablet shipments by 2015.
- It is becoming exceedingly difficult for Apple to manage annual iPhone introductions: The following graph highlights the purchase anticipation lag that Apple experienced with the iPhone 5 launch compared against the iPhone 4s launch. As smartphone buyers have become more sophisticated they have been more likely to delay purchases based on the anticipation of new iPhone launch. This purchase anticipation lag has grown dramatically for Apple -whipsawing revenues and leading to increased complexity in the company's supplier and retail streams.(click to enlarge)
As competition approaches functional parity in the smartphone space, and as the smartphone market is more effectively segmented by the competition (ex. phablets). It is highly unlikely, given the revenue share iPhone now represents, that Apple is comfortable with the increased risk it now sees in maintaining annual product refreshes for the iPhone line.
A new iPhone model, perhaps with a new form factor (think Macbook Air vs. Macbook Pro), allows segmentation of a maturing market, helps to better meet customer demand, and increases the frequency of iPhone introductions and thus, eliminates the increasing problems of the iPhone purchase anticipation lag.
Also, as the smartphone market has matured, emerging markets are key to company growth. Larger screened phones are proving to be popular in these markets where consumers are less willing to invest in both a tablet and smartphone, yet desire the flexibility of a more "tablet-like" experience from their smartphone. A reduction in iPhone 5 screen production may be an indication that the company believes an increase in iPhone screen size is a necessary move for emerging markets - again, explaining the decreases in iPhone 5 screen production.
Given the available information, currently I am interpreting the WSJ report as the possible indication of new iPhone product introduction for mid-2013.
I am looking toward the Jan 23 quarterly report by the company to provide further insight into the cause of the iPhone 5 screen production cut-backs. Currently, I am not reducing my holdings in Apple.
Disclosure: I am long AAPL.