Nikkei Asia has dropped one of the first signs of softer demand for the iPhone 12.
The publication reports that Apple has sharply reduced planned supply of the iPhone 12 mini in the first half of 2021. The company has also (allegedly) dialed down total smartphone production by about 20% relative to its December plans.
Likely a consequence of the bearish news, Apple shares struggled to gain traction during the March 10 trading session, even though the broad market performed well. The Cupertino company’s stock ended the day down -0.9%, while the S&P 500 was up 0.6%.
Third-party research firm IDC estimates that Apple shipped about 74 million iPhones in the first half of 2020. For the comparable period in 2021, rumors had surfaced that the number would spike to as high as 100 million units, a strong case in favor of the 5G super cycle.
Now, due in part to soft demand for the $699 mini version, the new projection for the first half is much more conservative: an increase of less than 1 million devices year-over-year. People familiar with the supply chain adjustments estimate that the drop in mini production relative to previous plan could reach an astounding 70% in the first half.
Analysts have jumped in and attempted to explain the production cuts. Isaiah Research offered its take:
“The battery for the iPhone 12 mini is much smaller than the older iPhone 11, which is about the same price. A 5G phone generally consumes more power, so consumers will be reluctant to buy a phone that, comparatively, does not have a good battery.”
Analyst Jeff Pu, from GF Securities, elaborated further:
“Consumers […] can immediately see the difference in screen size. If it's around the same price, many consumers would rather just pick the older iPhone 11, which has a larger screen, as they don't yet expect much from 5G.”
The Apple Maven’s take
It is understandable that Nikkei’s report would have a negative impact on Apple investors’ sentiment, and even on the share price. The 5G super cycle has been a major factor helping to fuel the stock’s rally, which increased in value by more than 80% in a challenging pandemic year.
But I would not be overly pessimistic about Apple or its stock, following Nikkei’s bearish report on the iPhone 12. Below, I list the key reasons why:
- Full-year unchanged: the alleged production cuts impact the first half of the year only, and likely the second calendar quarter more squarely. Smartphone sales are the weakest and least relevant to the company’s financial performance during the spring period, having accounted for only 18% of total year revenues in fiscal 2019 and 2020. For the full year, including the important holiday season, Nikkei reports that Apple has maintained its previous estimate of 230 million units to be produced in anticipation of strong demand in the back half of 2021 – which is better news.
- Tilted to the higher end: the bulk of the production cuts have happened at the lower end of the product lineup. The iPhone 12 Pro Max with 512 Gb of capacity, for example, retails for twice as much as the entry-level iPhone 12 mini. Less impressive mini revenues coupled with largely undisturbed total iPhone sales would mean higher ASP (average selling price), higher total revenues and probably better margins.
- Stock already de-risked: it is possible that some of the softness in iPhone 12 sales has already been factored into the stock price. Apple has been down 16% from the late January peak, far underperforming the S&P 500 and the rest of the FAAMG group. History suggests that buying Apple on 15% to 20% declines has paid off handsomely.
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(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting The Apple Maven)