Apple Inc. announced an iPhone production cut for the second year in a row. Should Investors sell AAPL stock now?
- Nikkei recently reported that Apple plans to cut production by 10%.
- Reports from Localytics also indicates a slowdown in Apple device activations, compared to a year ago.
- Should investors be worried and sell AAPL stock?
A recent report from Nikkei claims that Cupertino-based Apple (NSDQ:AAPL) is cutting iPhone production in the Jan-Mar 2017 quarter. The report has been the talk of the Apple camp even though it hasn't lead to any immediate impact on the stock. AAPL stock gained 0.2% in the first trading session of the new year, on January 3. Should investors be worried about the production cuts? Is it time to sell AAPL stock? Let's dig a little deeper here.
Is Apple's iPhone Segment Running Into Trouble?
Multiple media sources have lately claimed that iPhone 7 sales are slowing down. Nikkei was the latest to join the growing chorus of concerns around iPhone sales, stating that Apple is cutting iPhone production by 10% YoY in the first quarter of calendar year 2017. (See also: An Option Strategy To Play Apple Inc. (AAPL) Earnings)
The Nikkei report was preceded by a report from Localytics, which stated that iPhone 7 activations were down during the latest Christmas week as compared to Christmas 2015 week. According to Localytics, "The iPhone 6S saw a 52% lift during Christmas weekend 2015 compared the average of the three prior weekends, while the iPhone 7 saw a 25% lift during the same period in 2016. Additionally, the iPhone 6S Plus yielded a 21% increase of activations during the Christmas 2015 weekend versus 8% for the iPhone 7 Plus in 2016." Now, let's look at this a little bit closer at these numbers before jumping to conclusions.
The percentage change (for Christmas week) is based on the preceding 3-week sales and therefore, arriving at conclusions without a knowledge of the base (3-week sales preceding Christmas) could lead to erroneous conclusions, to say the least. What if iPhone 7 was off to a better start, as compared to the iPhone 6S? So, should investors be worried over these latest reports? Let's go a year back to answer this question.
Should AAPL Investors Be Worried?
Back in January 2016, Nikkei had reported that Apple was cutting iPhone 6S/6s Plus production by a much higher 30% during the first quarter of the calendar year 2016. Hence, the 10% production cut is much lower than what had occurred in the year earlier. This could also be a result of Apple's eagerness and constant progress towards a Just-in-time inventory management system. Tim Cook is famously associated with this move and in this context, production cuts coming out of the strong holiday quarter is more along expected lines.
Also, Localytics had claimed that iPhone 6S/6S plus adoption rates were coming in slower than the iPhone 6 numbers. But, what happened when Apple reported Q1 2016 numbers? The company reported YoY gains in its iPhone segment, which drove the company to its highest ever quarterly revenue. (See also: Apple Services: A Giant Is Growing Within Apple Inc.)
A Silver Lining For Apple
However, not all is gloom and doom as far Apple's iPhone segment is concerned. In a recent report by Flurry analytics, the research firm highlighted that Apple was still the top device (smartphone/tablet) manufacturer measured by activations during the holiday season. Apple accounted for 44% of the device activations, outdoing Samsung by more than 2:1. More interestingly, Flurry's data also showed that smartphone buyers during the 2016 holiday season gravitated towards phablets, a segment which includes Apple's plus models. The phablet segment accounted for 37% of holiday device activations, up from 27% in the year-ago period. This trend of phablets increasing their share of the smartphone market will be positive for Apple's iPhone ASPs as well as overall profit margins.
Putting It All Together
Selling AAPL stock on the recent spate of negatives is not a very smart idea, in our opinion. Why? Investors should take a little bit longer term view of Apple. While the recent negatives might lead to a temporary pullback in Apple stock price, we believe that the iPhone 8 Super Cycle and the emergence of Apple's Services segment as a clear growth driver make Apple stock a good buy for 2017. We believe that AAPL stock could rise to $135 this year. Hence, any pullbacks in the short term would present an opportunity to buy the stock on the cheap.
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