Apple is reducing build plans for the iPhone, according a research note from Sterne Agee analyst Shaw Wu. His sources in Apple's supply chain also indicated the company is working on a lower-cost iPhone model and an iPhone 5S for the second half of 2013. More interestingly, he said that Apple is showing signs of working on a large-screen iPhone model that could be ready in 2014.
That's a quadruple barrel of news, so let's dig into it. The first thing we'll note is that Shaw Wu is one of the analysts we respect the most. He is very plugged into Apple's supply chain, and he interprets what he learns better than most.
Lower iPhone Estimates
This is the first time Mr. Wu has weighed in on the subject that has weighed down $AAPL the most in the last several months and that's the idea that Apple is cutting orders for the iPhone. The analyst said that supply chain checks show that Apple has decreased its build plans and attributed it to an "an inventory drawdown ahead of refreshes in the [second half of 2013]."
He said that Wall Street consensus estimates have already been lowered, but that not enough. His forecast was lowered from 35 million units in the March quarter to 32.5 million units. Consensus is between 35 and 36 million.
"The good news," Mr. Wu wrote, "is that most investors we have talked to believe numbers are too high so we think a lot of fear is priced into shares. Near-term, the stock could remain choppy but we see this as a 2H story with product refreshes and potential new carrier deals."
Apple CEO Tim Cook commented on such supply chain stories in January. In Apple's January conference call with analysts, Mr. Cook said, "I would suggest that it's good to question the accuracy of any kind of rumor about build plans [...] and also stress that even if a particular data point were factual, it would be impossible to accurately interpret the data point as to what it meant for our overall business."
We imagine that's good advice, but will also note that Mr. Wu's opinion on the matter carries more weight for us than some other analysts.
iPhone 5S and Inexpensive iPhone
Everyone knows that a successor to the iPhone 5 will be released sometime this year, and Mr. Wu said that the supply chain confirms that Apple is working on that device now. Again, that shouldn't be a surprise to anyone.
He also said that he's finding indications that Apple is working on a less expensive iPhone model. This would presumably be a lower-end device that Apple would introduce for emerging markers such as China, India, and Brazil, where the iPhone's cost puts it out of reach of the vast majority of consumers.
He said that Apple appears to be working on a way of making the device with a case fashioned from composite materials. This device would also be ready sometime in the second half of 2013, but Mr. Wu didn't offer any additional details.
A Larger iPhone
The biggest news in Mr. Wu's research note was the tidbit about Apple working on a larger iPhone. There were no details, but this is the first credible report we've seen saying that Apple is actively in development on such a device.
"We continue to believe AAPL is leaving money on the table by not participating in larger touchscreen form factors dominated by Android vendors," Mr. Wu wrote. "But more importantly, we believe AAPL needs to reclaim high-end leadership as that is what its brand is about."
He added, "In our supplier checks, we are seeing evidence of a larger form factor iPhone being worked on but given its early stage, we don't believe we will see it ship until 2014."
We've often noted that the key to understanding supply chain-based rumors is to start from the premise that almost all of them have a kernel of truth. Apple is always working on any number of new products and manufacturing techniques, and only some of them are products that will ship.
Mr. Wu's note is light on details about the large-screen device, but we take it seriously. It also makes a great deal of sense that Apple would embrace the reality that the high end of the smartphone market is interested in larger screen devices.
In other words, the inevitability of a larger screen iPhone model coincides well with Mr. Wu's supply chain sources.
Dollars & Estimates
Shaw Wu left his iPad and Mac estimates in place—18.5 million units and 3.85 million units respectively—saying that demand for iPad remains strong. The lower iPhone estimates, however, resulted in lower overall estimates.
"With 2 weeks left, we believe AAPL will likely hit the lower end of its guidance," Mr. Wu wrote. "The good news is this is better than most expecting a miss."
He lowered March estimates to $41.3 billion in revenue and $10.00 in earnings per share (EPS), down from $42.9 billion and $10.25. This compares to consensus estimates of $42.9 billion in revenue and $10.21 EPS.
Mr. Wu lowered his price target from $715 per share to $630, and he maintained his "Buy" rating on the stock.
Shares of $AAPL rallied on Friday, ending the week at $443.66, a gain of $11.16 (+2.58 percent), on heavy volume of 22.8 million shares trading hands.
*In the interest of full disclosure, the author holds a tiny, almost insignificant share in AAPL stock that was not an influence in the creation of this article.