Apple Inc's Risky Product Cycle

In April, KGI analyst Ming-Chi Kuo released what he believes to be Apple's (NASDAQ: AAPL  ) new product roadmap for the remainder of 2014. If Kuo's timeline proves to be correct, Apple investor's may have some reason for concern, not about the new products being introduced, but about the risk that Apple may again see product supply shortages over the holidays. Conversely, Samsung  (NASDAQOTH: SSNLF  ) has taken a different approach with respect to product updates, and the company's plans should result in a much smoother, more successful transition. 

While analyst forecasts should be taken with a grain of salt, Kuo's past Apple predications have been among the industry's most reliable. Lending further credence to Kuo's predictions is the product roadmap's resemblance to previous Apple product update timelines.

Apple's product update cycle
Initially, iPad updates occurred in the first quarter of the year, but in 2012, updates were moved to the third quarter, along with the iPhone update. The new product cycle increased the scale and complexity of the company's product logistics; Apple now has approximately 60 days before the holidays to align both iPhone and iPad supply with global demand. This is not an insignificant task, considering the 51 million iPhones and 26 million iPads sold during the 2013 holiday sales period. With iPhone and iPads accounting for 76% of the company's revenue, it's not unreasonable to question the supply risks Apple is taking with the company's aggressive, late-year product updates.

Product shortages for the 2012 and 2013 holiday shopping seasons
The most recent example of revenue consequences of Apple's product cycle occurred with the September 2013 release of the Phone 5c and iPhone 5s. With no sales history for the iPhone 5c, Apple was unable to accurately forecast demand for either model. As a result, Apple experienced a shortage of the company's most important product, the iPhone 5s, throughout the holiday sales season.

Product shortages for Apple haven't been confined a single holiday quarter. During the company's January 2013 conference call, management reported that the company had experienced shortages of the iPhone 4, iPhone 5, iPad Mini, and iMac throughout the 2012 holiday sales period.. A tough year-over-year revenue comparison, exacerbated by lost product revenue, led to a 12% drop in Apple's stock price immediately following the company's earnings announcement.

It is increasingly likely, two months into the second quarter, that Apple is again pushing the majority of the company's product updates and new product introductions into the third and fourth quarter of this year. Kuo's 2014 new product roadmap, shown below, illustrates the logistical challenges and supply risks Apple could face heading into the 2014 holiday shopping season. Along with updates to existing products, the company is likely to be introducing a 4.7-inch iPhone 6 and an iWatch, two products without sales history, which increases the risk of inaccurate demand forecasts.

Source: KGI

Samsung's Approach
Samsung, Apple's biggest competitorseparates the release of the company's two premium smartphone models by approximately six months. The Galaxy S was released in the spring, while the Galaxy Note should hit the market in the fall. The six months between launch dates simplifies the company's logistics, allowing Samsung more time to align product supply with market demand.

What to watch
Tim Cook's hints and media reports indicate a busy third quarter for Apple, with anticipated updates to the iPad line, the launch of the iPhone 6, and the introduction of the iWatch. Additionally, the fourth quarter is likely to bring product updates for the Apple TV and Macbook Pro, plus the introduction of a 12-inch Macbook. The past two holiday quarters have shown the challenges Apple faces meeting demand for its products over the busy holiday quarter. Apple investors should be aware of how the company's aggressive, compressed product cycle increases the risk of supply imbalances, which could result in share price volatility in the first quarter of 2015.

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Comments from our Foolish Readers

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  • Report this Comment On May 06, 2014, at 3:40 PM, Plexigl wrote:

    It's hard to run out of supplies when no one buys the galaxy s5

  • Report this Comment On May 06, 2014, at 7:44 PM, bshamblin wrote:

    Plexigl, good point :)

    There were some changes made when this went though editing - which caused a slight shift in my points regarding Samsung - What I thought is the key point is the benefit (reduced risk) in spreading out product releases. It will be interesting to see if Apple decides to break apart iPhone releases moving forward. I would like to see is large screen iPhones releases first (highest price), followed by the traditional size screen later in the year. It would give the company more time to capture higher revenue iPhone sales and reduce some supplier risk.

  • Report this Comment On May 06, 2014, at 8:04 PM, Sunpowergo wrote:

    If Apple is making such a big mistake, why do they sell more high end phones than anybody? They sell new models into the Holiday season and make 3/4 of the mobile profits. Customers are happy because they get the latest itoy under the tree and Apple doesn't have to discount because the model is new. Samsung releases new models when nobody is looking. The 5c has been getting a bad rap, but it is still the second best selling smartphone. The biggest risk that I see is if they make a mistake, like what if the fingerprint reader didn't work when they had millions out there and they had a recall? It was a ballsey move to introduce such a critical new technology but only Apple could take that chance and pull it off. a year later Samsung puts out a reader that is a massive fail and nobody was looking so they get away with it.

  • Report this Comment On May 06, 2014, at 8:06 PM, Plexigl wrote:

    I agree that supply should be a consideration - but I feel its more important to spread out their rollouts so people can justify spending x amount in June and then x amount in December - vs having to decide whether to buy x or y

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Bill Shamblin

Market analyst, economist, stat geek, and comedy writer. My goal at The Fool? Tell the story behind the numbers. I've developed competitive analysis for Fortune 500 companies, managed an econometric model of US price and wage indices, and written comedy for syndicated radio programs. BA economics/computer science, University of Maryland. MBA Georgia Institute of Technology. Follow me at: @bshammy

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