iPhone Cuts Due to Improved Yields, Demand "Remains Robust"

Apple iPhone Cuts Think Positive

Apple’s recent cut in component orders for the iPhone 5 is not due to decreased demand and is not bad news for the company, according to a note sent to investors early Tuesday by Sterne Agee analyst Shaw Wu. Mr Wu’s checks with suppliers indicate that demand for Apple’s latest iPhone “remains robust” and that any reduction in component orders is due to improved yields, a good sign for the company.

The news of Apple’s reported reduction in iPhone component orders first hit late Sunday, when The Wall Street Journal claimed that Apple had cut orders roughly in half due to “weaker-than-expected” demand. This sent Apple’s stock tumbling, bringing shares near $500 for the first time in over a year. Even as of the time of this article, Apple is trading below $500.

Mr. Wu’s report joins that of others, including Wells Fargo’s Maynard Um, in downplaying the significance of any cut to Apple’s component orders. Unrealistic investor estimates, improving yields, supplier shifts, and a more rapid product release cycle all led to numbers that caused unnecessary panic, and neither analyst predicts a poor quarter for the Cupertino company.

Despite this, Mr. Wu predicts a “tricky” situation for Apple’s financial team in terms of the guidance it will deliver at its quarterly results call next Wednesday. Apple traditionally gives conservative guidance for future quarters which the market has quickly ignored due to a history of over-performance. Now, Mr. Wu argues, the market may interpret any conservative guidance as a sign of weak demand, and further punish the stock.

In a sign of optimism for investors and the company, Mr. Wu predicts that Apple will report positive earnings next week, possibly leading investors to calm their panic and regain confidence in the company’s position. He predicts sales of 47.5 million iPhones with gross margins of 38.7 percent, both above the market consensus.

Sterne Agee maintains a price target for AAPL of $840 and a “BUY” recommendation. AAPL is currently trading at 489.79, down 11.81 (2.31 percent).