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Apple Inc. (AAPL) Supply Chain Rumors Point to New Products

What the market share results don’t show is that because the overall smart device market is expanding rapidly, Apple’s unit sales still grew vigorously in Q4, 22% y/y for iPhone and 48% y/y for iPad.  Declining market share didn’t equate to reduced demand for Apple products, and it remains to be seen whether Apple has suffered any year over year declines in Q1.

iPhone:  Rumors of reductions in iPhone 5 component orders started in January with a report in the Wall Street Journal that attributed the cuts to weaker than expected demand.  This was followed on March 15 with Sterne Agee analyst Shaw Wu cutting his price target for Apple, although he did attribute the order cutbacks to preparations for a new iPhone.  Recently, the Wall Street Journal let fly with reports that “Apple plans to begin production of a refreshed iPhone similar in size and shape to its current one in the second quarter of the year…” and went on to project a possible summer launch.

My take:  The order cut backs for iPhone 5 were in preparation for iPhone 6, not due to reduced demand. More importantly, the rumors of cut backs in iPhone 5 screen orders that came out of Sharp (accompanying the iPad rumors discussed below) indicate to me that iPhone 6 will have a significantly larger screen, in the 4.5-inch range.  Although Apple has needed a low cost iPhone, they need the larger screen iPhone even more to fend off Android “phablets” and protect their position at the premium end of the market.  The iPhone 5 will become Apple’s low-cost compact alternative, in the way that previous generations of iPhones have. Except for the larger form factor, iPhone 6 will look almost the same as iP5, using the same anodized aluminum body construction.

iPad:  Rumors of order cut backs of fourth generation iPad screens began in January with a report from Reuters on Jan. 18 that Sharp had cut its iPad screen production to the bare minimum.  Once again, a variety of explanations were offered, but “decreased demand” was front and center.

My take:  The order cut backs were in preparation for a new iPad (fifth generation), which will get the full iPad mini make-over, including a near edge-to-edge screen.  This would require a redesigned screen, which is why the orders to Sharp were cut.   Like the iPad mini, the new iPad will be thinner and lighter and may even be a bit smaller, even as the screen size remains the same.

Apple may or may not exceed the Street’s expectations for the current quarter.  We’ll see soon enough. But in trying to divine financial performance from the supply chain rumors, the analysts squander what little value the rumors have as glimpses of Apple products to come.

Mark Hibben has a position in Apple. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple and Google.

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