The initial rumor-mill chatter about weak iPhone sales has blown up into actual warning signs, and some Apple (AAPL 2.62%) investors are running for the hills. The stock has surrendered 8% of its value this young year, and that's coming off an atypical 2015 that wound up being its first down year since 2008.
The culprit is the growing concern that iPhone production is slowing on softening consumer demand. Early reports claimed that iPhone assembler Foxconn was cutting hours for next month's Lunar New Year holiday. Foxconn denied those claims, but it still warned that revenue for December was 20% below the year earlier.
That in and of itself doesn't seal Apple's fate. A rough December at Foxconn and rumblings of scaling back production next month could mean a lot of different things that don't place Apple in dire straits. Foxconn does have other customers. Apple could be slowing iPhone 6s orders in anticipation of rolling out an updated iPhone 7 model sooner than previous annual updates.
Nothing is certain until it's announced, but between Foxconn and some Apple suppliers that are offering up bleak near-term outlooks, it's only natural to connect the dots. Wall Street pros who are paid to connect those dots before retail investors aren't taking any chances. We're seeing some pretty rough rhetoric about the company that until very recently was the market darling of consumer electronics.
- "Management's confidence now looks highly likely to be misplaced, which suggests that it was either ignorant of the challenges it faced or deliberately overstating underlying trends," Pacific Crest wrote, concluding that the merry days of assuming that Apple perpetually puts out conservative guidance are toast.
- "We now believe Apple is experiencing weaker than expected iPhone demand," UBS opined. "News of worker reductions at key EMS and component vendors can't be ignored."
- "Our sense is that iPhones are likely sitting at higher than optimal inventory across multiple geographies, and as a result, AAPL has implemented further production curtailment across the supply chain," RBC wrote, but at least it limited its concern to the current quarter. It sees this as a temporary hiccup that should be resolved by the time we get to Apple's fiscal third quarter.
Some analysts feel hoodwinked, and others can't believe how quickly the device that drives the lion's share of Apple's revenue and earnings has turned. UBS was leaning on recent surveys showing that Android switchers to iOS are on the rise, implying that the weakness is coming mostly from existing iPhone owners. That's pretty significant, and it may lead one to wonder if U.S. wireless providers' move away from subsidized smartphones isn't at the root of this recent weakness.
Until recently, wireless carriers were willing to eat hundreds of dollars upfront to get you into a two-year service contract. The shift these days is to get buyers to finance new phone purchases at the full retail price in exchange for cheaper connectivity charges. It may seem like a small distinction, but it does have a lingering psychological impact on existing owners pondering an upgrade. In the old days it felt as if you were ripping yourself off if you didn't upgrade after two years, since you were still paying the inflated monthly service price. Now it's almost as if it's a relief after the monthly financing installments are complete, giving you a price break until one has to upgrade.
The onus is now on Apple to prove that this is not the case. Investors and analysts have had their confidence rattled. The stock has fallen in six of the past seven months, and it's digging itself into a big hole so far in January. However, with Apple's history of innovation and current low valuation even in light of cascading profit targets. it's hard to bet against the class act of Cupertino for the long haul. The future is as bright as the present is not.