Shares of Apple (NASDAQ:AAPL) are starting off the week in the red, thanks in large part to renewed fears around iPhone demand. A similar narrative played out last week when supplier Lumentum Holdings drastically cut its full-year outlook, less than two weeks after issuing guidance when it reported third-quarter earnings. Lumentum provides 3D sensing components used in Apple's TrueDepth camera system.
Meanwhile, widely followed Apple analyst Ming-Chi Kuo also cut his estimates on iPhone XR unit volumes earlier this month.
Here's what investors need to know about the latest supply chain rumors.
Cutting production orders (again)
The Wall Street Journal [subscription required] reports that the company has cut production orders for the iPhone XS, XS Max, and XR, which is hurting a wide range of suppliers, including component makers as well as contract manufacturers.
The iPhone XR is getting the biggest cuts, the Journal reports, with Apple previously reducing orders by "up to a third" of the 70 million units it had initially ordered from suppliers to be made between September and February. More recently, Apple has again reduced its orders for the iPhone XR, according to the report. Analysts had high hopes for the iPhone XR initially, given its relatively more-affordable price and inclusion of many of the same headline features found in the pricier iPhone XS and XS Max, such as an edge-to-edge display and Face ID. But starting at $750, the iPhone XR is still an expensive phone compared with the competition.
Apple said this month that it would stop disclosing unit sales. In addition to reducing transparency for investors, one supplier told the Journal, the decision will also make it harder for suppliers to make their own financial forecasts. Another forecasting challenge is that the iPhone pricing spectrum is also growing wider. Apple CFO Luca Maestri had cited the "wider sales price dispersion within any given product line" as part of the company's rationale for the reporting change.
Supply chain reports have never been "a great proxy for what's going on"
The good news for patient long-term investors is that when the market overreacts to supply chain rumors, it can present a compelling buying opportunity. Morgan Stanley analyst Katy Huberty argued last week that investors are still focusing too much on unit sales, failing to properly appreciate the growing importance of the services business.
For years, Apple has tried to get investors to disregard supply chain rumors, an effort that has clearly been unsuccessful. Investors should always remember this quote from CEO Tim Cook from 2013:
I would suggest it's good to question the accuracy of any kind of rumor about build plans, and also stress that even if a particular data point were factual, it would be impossible to accurately interpret the data point as to what it meant for our overall business because the supply chain is very complex and we obviously have multiple sources for things, yields might vary, supply performance can vary. The beginning inventory positions can vary. I mean there is just a long list of things that would make any single data point not a great proxy for what's going on.