Munster: Apple’s iPhone Production Cut May Not Signal Overall Sales Reduction

| News

A Nikkei report late Tuesday claims that Apple is preparing to reduce iPhone 6s and 6s Plus production by 30 percent for the first calendar quarter of 2016 due to significant levels of unsold inventory at retailers across China, Japan, Europe, and the United States. The production cut, which the report attributed to "lackluster" sales compared to last year's iPhone models, set off a storm of gloomy predictions, after hours selloffs, and analyst rebuttals.

The Nikkei report claims that Apple had originally instructed its suppliers to keep production of the iPhone 6s and 6s Plus at the same levels the iPhone 6 and 6 Plus required in the year-ago quarter, but the Cupertino company decided that the build-up of unsold inventory required a temporary reduction to ensure that retailers can clear the shelves. The report clarifies, however, that Apple products "have not lost their appeal," and that Apple is expected to restore production to normal levels for the April-to-June quarter.

foxconn factoryImage via AFP

Even with steady demand, the alleged 30 percent cut in production is relatively large, and investors fear that it could signal the iPhone's first ever year-over-year drop in sales. The news also set off worries about Apple's wide supplier network, with companies such as Japan Display, Sharp, LG Display, Sony, TDK, Alps Electric, and Kyocera all certain to be impacted by a cut in iPhone production.

Further supporting the rumors of a production cut, The Wall Street Journal reported that the Chinese city of Zhengzhou is set to provide Apple supplier Foxconn with a $12.6 million subsidy in order to avoid layoffs during the period.

As analysts and investors responded to the news, however, PiperJaffray's Gene Munster offered a different take, arguing that even if the production cut rumors are true, Apple's own guidance on sales is likely to be more accurate than attempting to decipher Apple's relatively complicated supplier network. In a note released late Tuesday (via AppleInsider), Mr. Munster told investors:

We believe the December guide implies slight growth of iPhone y/y including CEO Tim Cook's specific mention that iPhones would grow y/y...

Overall, this data point, albeit old, lends us confidence that March may not be as bad as expected assuming that if iPhone demand is up slightly in December and the overall smartphone market is stable with a large upgrade base of existing iPhone users, we would expect narrower change in the December and March growth rates.

Based on this analysis, PiperJaffray did not downgrade its rating for Apple, and has a current price target of $179. Mr. Munster also suggests that Apple's upcoming Q1 2016 earnings call on January 26th will shed more light on the situation and assuage investor concerns.

AAPL is currently down $2.36 (2.30 percent) in pre-market trading, at a value of $100.35.

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