There are growing concerns that Apple (NASDAQ:AAPL) isn’t seeing expected iPhone XR sales. As a result, Apple stock got hammered yesterday, closing down over 5%. While the possibility of a continued slowdown in iPhone sales has AAPL investors on edge, it’s the company’s suppliers that are taking the real hit.
The iPhone XR was supposed to be the new iPhone that had all the right elements to kick off an upgrade cycle. It has the latest iPhone features, a big screen, cool new colors, long battery life and an affordable price ($250 less than the cheapest iPhone XS). When pre-orders for latest iPhone began in October, there was a feeling that the iPhone XR checked off so many boxes for consumers that it would sell, and sell big. The upside for Apple stock was considerable.
Not so fast …
It appears that consumers didn’t read the analyst notes, because there are warning signs they are not beating a path to the local Apple Store.
Yesterday, two of Apple’s key iPhone suppliers warned of weak results because of reduced demand from their largest customer: Apple. Foxconn, the company that assembles most of Apple’s iPhones, missed revenue expectations when it reported its earnings yesterday. Japan Display, a supplier of iPhone XR displays, posted a loss yesterday and lowered forecasts based on weaker than expected demand from smartphone makers. Lumentum (NASDAQ:LITE) a company that supplies components for the iPhone’s FaceID system lowered its sales forecast based on its largest customer reducing orders … Apple is Lumentum’s largest customer.
Analysts were quick to react. MacRumors reported that Ming-Chi Kuo, a noted Apple analyst who is usually bullish on the company released a research note cutting estimates for iPhone XR shipments. Kuo feels that factors, including the trade war with China, expectations that the iPhone XR should have had a dual camera and narrower bezels and competition in the Chinese market from Huawei are hurting Apple. As a result, he has cut his estimate for the number of iPhone XR units AAPL is expected to sell during this product lifecycle (in other words, until next year’s iPhones are released) from 100 million to 70 million.
There was enough noise yesterday about lower than expected iPhone XR sales for Apple stock to take a big hit, erasing its gains through the late summer and fall.
Apple Suppliers Have It Worse
It has always been risky to be an iPhone supplier. Until recently, the biggest danger was that Apple would decide to move to a custom component, ditching a supplier altogether. In the current era of slow iPhone sales, the risk is that Apple places a big order, then slashes it.
Apple stock may have taken a 5% drubbing on Monday, but Lumentum saw a third of its value disappear after reporting orders for its facial recognition sensors had been slashed.
As Bloomberg points out, AAPL is going through a rough patch with iPhone sales, but it has options. It can raise prices to make up for reduced volume, and it is increasingly leveraging services for the 1.3 billion devices it already has out there. It’s also focusing on making existing iPhones last longer in the hope of building customer satisfaction. The company’s suppliers? When orders are cut, they have to scramble to find new customers, and with the overall smartphone market slowing, that’s not easy. They are also often left with inventory of components that makes them vulnerable to Apple coming back and pushing for price cuts.
If you’re an AAPL investor, Monday’s hammering of Apple stock hurt, but is likely nothing more than a blip in the long term. But the results of slower than expected iPhone XR sales are making much bigger waves in Apple’s supply chain, where the real damage is being done.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.