Jabil Circuit Implosion Not Negative For Apple

About: Apple Inc. (AAPL), Includes: JBL
by: Paulo Santos

As I write this, Jabil Circuit (NYSE:JBL) is dropping 18.8% in pre-market. This, in turn, is driving Apple (NASDAQ:AAPL) down 1.6%. What is the connection here? Jabil Circuit is the alleged manufacturer of the iPhone 5C, and its disappointing earnings and outlook was laid at the feet of a single "diversified manufacturing services" client. No client ought to be larger than Apple with its iPhone 5C business. So the thinking goes that the iPhone 5C is doing well below expectations. Together with the news that the China Mobile (NYSE:CHL) agreement is not yet finalized, this has led to selling in Apple.

It's not as bad as it looks

I am going to say that this is not as bad as it looks. For two main reasons:

  • It was to be expected and;
  • The iPhone 5S picked up the slack.

It was to be expected because the iPhone 5C was basically a low-cost, cheap looking piece of plastic with the iPhone 5 innards at just a $100 discount to the iPhone 5S. I said as much in my article "The True Objective Of The iPhone 5C". Whereas before the 5C arrived Apple was seeing its sales mix shift towards older models, to the point where 50% of sales were already iPhone 4 and 4S, the 5C should have inverted that in two ways:

  • First, it should have led to a sales mix skewed towards the iPhone 5S;
  • And second, when the sales happen on the 5C they should be happening at nearly the same margins as the 5S because the phone ought to be significantly cheaper to manufacture.

This second point is borne out in an iSuppli teardown, with the iPhone 5C showing a BOM of $173 for the most basic model, versus $199 for the most basic iPhone 5S. So here Apple is able to compensate around ¼ of the price difference by a lower cost.

As for the sales mix, the objective seems to have been attained. According to Consumer Intelligence Research Partners the sales mix shifted from the 50% new/50% old models back in 2012 to around 64% iPhone 5S, 27% iPhone 5C, 9% iPhone 4S. Thus my thesis that the 5S/5C combination would allow for lower cannibalization of the higher-margin newer product is being confirmed in the data, with a 14% share gain by the newer iPhone 5S.

In that regard, thus, Jabil Circuit's great disappointment with its "diversified manufacturing services" client, that is with Apple's iPhone 5C, is not really a problem for Apple but just the confirmation that the strategy of issuing the iPhone 5C worked as intended.


It's wrong to draw a negative conclusion for Apple from Jabil Circuit's pre-market implosion. While it does indicate weakness for the iPhone 5C, this weakness was rather expected in that the iPhone 5S should have picked up the slack and increased its presence in Apple's sales mix. This is borne by the available data, and the sales mix shift is positive for Apple.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.