The battleground stock that is Apple (AAPL +1.18%) continues to see investors focus heavily on supply chain rumblings from the other side of the world. Shares were weak today, down over 1% this morning, in part due to bearish sentiment among analysts. On the other hand, there's also some data that could potentially be good news for the iPhone maker.
Which supply chain rumors should investors believe?
The bad news
Topeka Capital analyst Brian White, who has the Street high price target of $888, says that things aren't so great within Apple's supply chain. White is the analyst that has compiled a group of Apple suppliers and bundled them into what he refers to as the "Apple Monitor." The goal is to gain insight into Apple's pipeline by looking at sales activity of suppliers.
White's data shows that the Apple Monitor saw February sales drop by a whopping 31% sequentially from January, far worse than the average 8% decline due to normal seasonality. That figure is the worst performance that the analyst has on record.
CLSA analyst Avi Silver has now downgraded his rating on Apple from "outperform" to "buy" while reducing his price target from $575 to $505, citing lower iPhone unit estimates in the June quarter. This expectation is partially based on a rumored iPhone launch during the summer, in which case sales may decline ahead of new models as consumers are now well attuned to Apple's rumored product cycles. Silver also sees an upcoming "iPhone Mini" having a negative effect on product mix and margins.
Baird Capital analyst William Power is on record saying the firm's semiconductor team expects iPhone 5 and iPad shipments to come in below consensus estimates. With the Mobile World Congress wrapping up last week, consumers and investors have gotten a glimpse of the competitive landscape and Power has concerns over Apple's product demand following the trade show. The analyst is sticking with his $465 price target, which represents modest upside from current prices.
The good news
Reuters is now reporting that both Taiwan Semiconductor (TSM +6.30%) and Hon Hai (Foxconn's parent company) are each planning on adding 5,000 workers to their ranks. Both companies are looking to recruit students that are preparing to graduate from Taiwan University this year.
The reported job additions are notable for several reasons. First off, Apple shares fell 2% last month on reports that Foxconn was instituting a hiring freeze. Part of the pessimism was since the Financial Times speculated it was due to "weakening demand." It didn't matter much that other analysts actually thought the hiring freeze was due to improved working conditions and better wages, leading to higher employee retention.
Regardless, reports that Hon Hai is now ramping up recruiting could signal that it needs more employees to ramp up production of upcoming Apple devices. Apple is hardly Hon Hai's only customer, but it is easily the company's biggest.
To date, Taiwan Semiconductor and Apple have had no publicly direct business relationship. Speculation has persisted for years that the two companies would inevitably ink a partnership as Apple tries to reduce its reliance on Samsung, but nothing has materialized yet. Apple indirectly gets iDevice chips made by TSMC through other suppliers like Qualcomm and Broadcom, but has never tapped the chip manufacturer directly.
There's even a possibility that the two have now quietly hooked up. Apple has nonchalantly upgraded its Apple TV set-top box, and the improvements are all internal. Interestingly, the A5 processor found inside the new models is slightly smaller than the ones found in previous generations. That points to a die shrink, possibly to TSMC's 28-nanometer manufacturing node. We'll have to wait for deeper analysis before knowing where these newer, smaller A5 processors came from.
TMSC adding to its ranks could still mean increased activity related to Apple devices, either directly or indirectly.
The ugly news
Ultimately, supply chain rumors are just that: rumors. Investors have been warned time and time again not to pay too much attention to such speculation. While supply chain rumors can help add some perspective to what may possibly be happening behind the scenes, investors would be mistaken to make buy or sell decisions based solely on them. That's what long-term fundamentals are for.
