Proof That Apple, Inc. Is Preparing a Massive iPhone 6 Launch

iPhone 5c being manufactured. Source: Apple.

Investors have high expectations for Apple's (NASDAQ: AAPL  ) iPhone 6 launch later this year, and for good reason. This year's pipeline will probably trigger a massive upgrade cycle, unleashing pent-up demand for larger iPhones.

The Wall Street Journal has already reported that Apple has ordered 70 million to 80 million units from suppliers. I prefer to discount supply-chain rumors of this sort, but at the same time there is probably some directional accuracy. Irrespective of the specific numbers floating around, Apple is undoubtedly planning for an enormous iPhone 6 launch.

In fact, there are other clues beyond what "people familiar with the matter" have to say.

Party like its 2007
Morgan Stanley analyst Katy Huberty put out a research note last week on why she thinks Apple is preparing for a robust holiday quarter. The longtime Apple analyst points to Apple's off-balance sheet commitments, which have jumped to $21 billion total. That represents the highest sequential growth in the June quarter since Apple launched the original iPhone in 2007.

She attributes the increase to heightened iPhone supply-chain activity and the likelihood that Apple is indeed launching its iWatch this year and fulfilling Tim Cook's promise to enter a new product category. Let's take this a step further.

What happened last time?
I noticed a similar trend back in 2012, just after the iPhone 5 was released. During that quarter, manufacturing and component purchase commitments put up a huge $7.5 billion sequential increase, which I considered evidence that Apple was expecting a blowout quarter. Manufacturing and component purchase commitments are the bulk of Apple's off-balance sheet commitments. Did Apple subsequently report a blowout? Not exactly.

iPhone 5 being manufactured. Source: Apple.

iPhone unit sales came in below expectations, shares sold off by 11%, and the significant pullback that was already under way just got worse.

The rest of Apple's additional off-balance sheet commitments consists "mainly of commitments to acquire capital assets, including product tooling and manufacturing process equipment, and commitments related to advertising, research and development, Internet and telecommunications services, and other obligations." Manufacturing gear is easily the biggest piece here.

Source: SEC filings. Fiscal quarters shown.

Additional commitments have indeed jumped to all-time highs of $5.6 billion, which does suggest that Apple is preparing to install a lot of manufacturing gear for new or redesigned products. The last time this figure increased to comparable levels was back in 2012 ahead of the iPhone 5 launch, rising to $4.5 billion. This generally occurs every two years, in line with Apple's tick-tock iPhone design cycle.

This is what happened the last two times
Like last time, Apple's manufacturing ramp doesn't necessarily guarantee a blowout. The iPhone shortfall from January 2013 was due to supply constraints, as Apple was still unable to produce enough to satisfy demand and Tim Cook acknowledged that the model was constrained throughout the entire quarter.

A similar storyline played out back in January. That time, Apple made a mistake forecasting its product mix, expecting the iPhone 5c to sell better than it did. Instead, the mix was heavily weighted toward the 5s, and Apple was scrambling to shift production to the flagship model. For all intents and purposes, it was supply constraints again.

Apple is undoubtedly preparing for a massive iPhone 6 launch and quite likely an iWatch as well. The larger boost in manufacturing commitments plays into the theory that Apple is launching two redesigned iPhones as well as an entirely new hardware product. While a monster holiday quarter isn't guaranteed, it's still pretty likely.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 27, 2014, at 4:18 PM, rphunter wrote:

    It amazes me how many people think they can tell Apple how to make money. They all but print their own. What company has more money in the bank? What company sells more smartphones of ANY single model? What company regularly comes up with new ideas, or new ways of marketing old ideas, more often? Answer, no company does this.

    And, Yes, I plan to buy an iPhone 6 as soon as they are available.

  • Report this Comment On July 28, 2014, at 10:17 AM, Blackhawk wrote:

    I'm a technically challenged individual when it comes to all these smart devices, but I believe in this company's future.

    Fool on

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Evan Niu

Evan is a Senior Technology Specialist at The Motley Fool. He was previously a Senior Trading Specialist at a major discount broker. Evan graduated from the University of Texas at Austin, and is a CFA charterholder.

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