Reports that Apple has cut orders for iPhone 5 and iPad components have investors on edge as they wait for the Cupertino company’s fourth quarter earnings release, due late Wednesday. While lower orders for components could indeed signal a slowdown, most of the reports focus on orders from one supplier, Sharp Corp.
There are many reasons Apple could be reducing its exposure to Japan’s Sharp. Most of Apple’s other component suppliers are in Korea, where cost structures tend to be lower than they are in Japan. And Sharp’s future is uncertain. The company lost more than $5 billion last year and has said that it might not be able to survive without a partner. Lenovo is often named as a possible partner for Sharp, and last week reports that the company may be selling its Chinese TV assembly plant to Lenovo boosted Sharp’s stock price.
Apple, meanwhile, has seen its stock price tank as investors worry that lower component orders mean lower demand for its iconic devices. While some see this as a sign that Apple’s mobile devices will settle into a niche as the company’s Macintosh computers did, others believe the concerns have created a buying opportunity. Analyst Shaw Wu of Sterne Agee says Apple is trading more than 40% below his target price for the stock.
“Based on our supplier checks, we anticipate in-line revenue and an EPS beat driven by iPhone upside but guidance will likely be vintage conservative,” said Wu. “We believe there is great confusion with press reports of order cuts and weak demand. From our understanding, the reason is two-fold: (1) much improved yields meaning lower component builds and (2) supplier shifts. As far as we can tell, iPhone 5 demand remains robust.”
iPad demand is the other big question mark for Apple. Reuters says Sharp has almost completely stopped making displays for the 9.7-inch iPad, but again that could be because Apple wants to decrease its exposure to Sharp. It could also signal a shift in demand from the full-size iPad to the new 7-inch iPad mini.
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