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Apple Drops to 11-Month Low on Reports of IPhone Cutbacks

By Amy Thomson and Karl Baker
January 14, 2013 4:22 PM EST 134 Comments
Apple Shares Drop After Report About Cuts in IPhone Part Orders
Apple Shares Drop After Report About Cuts in IPhone Part Orders

Apple Inc. (AAPL) declined to the lowest price in 11 months after the Nikkei newswire reported that production of the iPhone was cut on weak demand.

Apple ordered about half the 65 million iPhone 5 displays it originally targeted for this quarter, Nikkei said, citing an unnamed executive at a component maker. Manufacturing curbs have been widely known since December, according to Steven Milunovich and Mark Moskowitz, analysts at UBS AG and JPMorgan Chase & Co., respectively.

Last month, Apple cut production by about 30 percent, which may be the result of inventory rebalancing or lower consumer demand, Milunovich wrote in a research report today. Order cuts may also be due to suppliers becoming more adept at building the latest iPhone, reducing the need for Apple to order excess parts, Moskowitz wrote in a note to clients today.

“The bigger message related to any potential order cuts could be that iPhone 5 manufacturing yields and thereby gross margin are on the rebound,” Moskowitz said. He said that his projection for 25 million iPhone 5 units to be sold in the quarters ending in December and in March will be exceeded under the scenario Nikkei reported.

The stock fell 3.6 percent to $501.75 in New York, the lowest closing price since Feb. 15. Apple extended its decline to 28 percent since hitting a record high in September.

Bethan Lloyd, a spokeswoman for Apple in the U.K., didn’t return calls seeking comment. Among Apple suppliers in Asia, representatives from Sharp Corp., Japan Display Inc. and Hon Hai Precision Industry Co. declined to comment.

‘Old News’

“Order cuts appear to be old news,” Milunovich wrote. He said he reduced his iPhone sales estimates in December after checks with suppliers indicated a reduction in the number of phones being made.

IPhone sales could be slowing because smartphones are already common in developed markets, where Apple is strongest, said James Cordwell, an analyst at Atlantic Equities Service in London.

“We’re getting close to saturation,” said Cordwell, who rates Apple shares “overweight” and doesn’t own any. “The real growth is going to come from emerging markets, and Apple’s share in emerging markets is much lower than it is in other markets at the moment due to such high prices.”

Apple is also facing increasing competition from manufacturers using Google Inc. (GOOG)’s Android software, including Samsung Electronics Co. (005930) Android phones are gaining users in emerging markets because they are cheaper than the iPhone.

Increased Competition

Research In Motion Ltd. (RIM), the maker of the BlackBerry smartphone, is trading at its highest level in almost a year amid signs that demand for the iPhone may be waning.

RIM’s stock rose 10 percent to $14.95, following a 14 percent gain on Jan. 11. Shares of the Waterloo, Ontario-based company have gained 26 percent this year.

“The iPhone is no longer unique, fashion fatigue will transpire and the rich price premium will be impossible to sustain,” Per Lindberg, an analyst at ABG Sundal Collier in London, wrote in a research report today.

First-quarter iPhone shipments may decline 25 percent from the previous period, Peter Yu, an analyst at BNP Paribas, said today in a note. Analysts’ average second-quarter revenue estimate for Apple may drop by about $4 billion to $5 billion and the earnings-per-share projection may decline by $1 to $1.50, Abhey Lamba, an analyst at Mizuho Securities USA, said in a report.

The iPhone may be facing supply chain constraints as Apple shortens its product cycle to introduce new models more frequently, Walter Piecyk, an analyst at BTIG LLC, said in an interview.

“It takes a manufacturer time to do it efficiently,” he said. “An iPhone sold in the March quarter is more profitable than an iPhone sold in the December quarter.”

To contact the reporters on this story: Amy Thomson in London at athomson6@bloomberg.net; Karl Baker in New York at kbaker30@bloomberg.net

To contact the editors responsible for this story: Kenneth Wong at kwong11@bloomberg.net; Tom Giles at tgiles5@bloomberg.net

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