While the world was singing Auld Lang Syne on New Year’s Eve, the Whiz Kids in Cupertino were singing a much different tune — one that was a bit sadder. It turns out that Apple Inc. (NASDAQ:AAPL) may have a huge problem on its hands. It may not be selling as many iPhones as we all think.
A new report from a credible source surfaced over the long weekend that suggests that Apple may be planning to cut production of its two flagship smartphones by double-digits during the first quarter.
Some analysts have jumped on the potential production cuts as the latest in a series of missteps for Apple and could serve as a major warning sign that its dominance in the world of tech could finally be waning. Just as other smartphone rivals and pioneers have succumbed to their success.
Or it could just be simply noise.
For investors, looking deeper into the report provides the answer.
AAPL Cuts Are Big
Nikkei Inc. may not be a household name here in the U.S., but the 140-year-old publishing firm is one of the largest business and financial publications in the world. It’s Asia’s Wall Street Journal or Financial Times — which it now owns. So it’s a real and credible news source.
The paper looked into AAPL supplier data, and what they found was a bit troubling. According to Nikkei, recent cuts in parts ordering would mean that Apple is planning on cutting its iPhone 7 and iPhone 7 Plus production by roughly 10% during the first quarter of 2017. This round of manufacturing cuts follows a 20% cut to the production of the iPhone 7 at the start of this year.
The reason for the cuts is easy to discern. AAPL simply isn’t selling as many of its flagship smartphones as it thought it would. During its last earnings report, Apple announced a 9% decline in annual revenues. This drop was the first time that AAPL saw falling sales figures in nearly 15 years. iPhones contribute more than 2/3 of Apples total revenues. So they are to blame for the drop in total sales.
Activation data from Localytics helps support lower sales and Nikkei’s estimates of the upcoming production cuts.
Analysts have postulated that the iPhone 7’s lack of innovative features and the fact that wireless carriers no longer subsidize smartphone purchases as the main reasons for the sales decline. People are holding on to their iPhones longer. There is simply aren’t as many reasons to upgrade as fast anymore.
For AAPL stock, this is a major blow. Apple thrives on continued sales of its latest products to keep its growth and profits going. So the fact that it has cut its main flagship product line is very troubling. Cue the hallucinations of Motorola RAZR’s, old Nokia Corp (ADR) (NYSE:NOK) brick phones and BlackBerry Ltd’s (NASDAQ:BBRY) dancing around Tim Cook’s head. Lower sales followed by dwindling production was precisely when those wireless stories began their decent.
Why The Cuts at AAPL Stock May Not Mean Anything
So on the one hand, the production cuts and declining revenues at Apple could signal trouble for AAPL stock.
On the other, it could mean absolutely nothing.
For one thing, AAPL isn’t alone in the seeing lower revenues thanks in part to customers keep their phones for longer. It’s a common trend across the entire industry. According to tech research company IDC, global smartphone shipments in 2016 were barely higher than 2015’s levels. The key for Apple is that its phones still are the number one selling brand in the world. So even though the overall pie is getting smaller, Apple’s piece is still the biggest.
Secondly, the production cuts could just mean that Apple is gearing up for the long-awaited iPhone 8 release. The truth is, when looking at its history, there have been several iPhone models that could be considered “throw-aways.” These bridges and fillers are needed until AAPL can design the tech that it wants to for a new feature. But you have to give the people something. That was especially important when upgrading smartphones took place at faster rates.
Given its lack of innovation, the iPhone 7 Series could be thought of like that bridge line of phones.
You can speculate all you want, but there’s a good chance that the iPhone 8 will be packed with new features — perhaps even more so considering that this year is the 10th anniversary of the iPhone. I’d be willing to bet that AAPL has something special up its sleeve.
And finally, the production cuts and dropping revenues are meaningless because of the more $200 billion in cash on its balance sheet. That sheer amount of cash means that AAPL can “kick the can” for a long while before it must act. It has the luxury of being able to try out different ideas and see if they stick.
That wasn’t the case for NOK, Motorola and BBRY, which had some serious debts to deal with and a lack of that sort of monster cash pile.
Apple Isn’t Going Anywhere
So on the surface, the production cut news could be quite troubling indeed. But the reality of the situation is that Apple will be just fine. The firm is still the reigning king of the smartphone hill and that fact isn’t going away. New product launches should help it keep its lead, and its monster cash balance should give it time to develop those products. Investors in AAPL stock shouldn’t worry about the report from Nikkei.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.