Apple’s Manufacturing Costs Soar: Does This Mean a New Product?

A new research note adds more credence to Apple's first post-Steve Jobs product.

Sep 3, 2014 at 10:35AM


Source: AppleInsider.

It's official! Apple (NASDAQ:AAPL) recently sent out the press invites for a "special" Sept. 9 event with the tag line "Wish we could say more." For Apple analysts and fans, the invite didn't say anything they didn't already know. For a company once hallmarked by secrecy, Apple's supply chain leaks and media outreach have become almost formulaic -- this is the official iPhone 6 release event.

However, this time may actually be different. A new research note from Amit Daryanani of RBC Capital Markets reports that Apple's manufacturing and component costs are up substantially, leading to the widespread theory that the company will release a new product. Will Apple finally bring its first post-Steve Jobs device to market?

About that research note
Daryanani specifically analyzed Apple's manufacturing and component costs. As many companies do, Apple develops the design for a device, then looks to suppliers to provide components and a host of Asian-based manufacturers to assemble to final product. One of the better-known manufacturers is Taiwan-based Foxconn.

Those specific costs were up 18.5% year over year for the quarter ended in June, according to the note. This large increase is noteworthy because this is Apple's "ramp-up" period for its heavy first fiscal quarter which begins in October and includes the holiday season. Analysts also expect the new iPhone model release to come during the period.

And while these costs could specifically relate to increased costs or production of a larger number of iPhone units, a specific and "material" spike in commitments for tooling -- aids, molds, fixtures, cutting tools, and such -- points toward an entirely new form factor in addition to upgrades to Apple's iPhone line.

Apple's top line could use a new product
Apple has been on a run of late, with the stock sitting near a split-adjusted high on a per-share basis. Part of that is due to its massive share buyback program. That said, the company's current market capitalization of roughly $615 billion falls short of its all-time high of over $650 billion. Apple is doing well on the back of iPhone 6 speculation and a 7-1 stock split that "broadened" the investing base. Company shares are up nearly 50% on a one-year basis.

However, the fundamentals did not do as well during the same period. On a top-line basis, the company grew revenue 5.1% over the past 12 months. Apple increased its earnings per share 8.2% over this time frame with economies of scale, a better product mix (read: more iPhones sold), and its massive share buyback outweighing those aforementioned additional manufacturing and component costs, among others.

Apple's smartwatch will help the bottom line
Apple's widely anticipated smartwatch will help to grow the top line. If in-the-know Apple analyst Katy Huberty is correct, it should also provide a boost to Apple's bottom line. The Morgan Stanley veteran estimates Apple's smartwatch -- dubbed iTime -- will sell anywhere between 30 million to 60 million units during its first year on the market, at an average selling price of $300, and will provide gross margin between 40% and 50%.

For perspective, Apple's gross margin over the last four fiscal quarters was 38.4% -- below Huberty's least-ambitious gross margin figure. To be fair, many have questioned Huberty's figures, but mostly on the units sold and timing rather than than the gross margin figure.

Apple analyst and supply chain guru Ming-Chi Kuo took a more bearish path initially by predicting the watch will face substantive production delays, forcing a 2015 release. Follow-up reports point toward Apple announcing its smartwatch at the Sept. 9 event for a later release.

Final thoughts
While most Apple fans are looking forward to the rollout of the newest iteration of its hugely successful iPhone line on Sept. 9, I'll be eagerly anticipating a smartwatch announcement. At this point, I feel iPhone success has already been figured into the company's valuation. However, if Apple can amaze us once again with a revolutionary product, look for it to power past its all-time high market valuation.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Jamal Carnette has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information