Apple (AAPL) shares today are up $1.83, or 0.4%, at $469.75 despite a warning this morning from Jefferies & Co.’s Peter Misek, who believes the company is cutting production again for its iPhone, after rumors of production cuts that dominated headlines the prior two months, and that a larger-screen version of the phone may not arrive till next year.
Misek, who has a Hold rating on the stock, and a $500 price target, writes that sales of the iPhone 5 seem to be dropping off and that the company is preparing for an iPhone 5S, perhaps going on sale in June, possibly at China Mobile (CHL) and that a cheaper iPhone seems to be on the way as well:
Phone 5 sales are decelerating faster than expected and builds have been cut again from 40M to 30M. Admittedly, suppliers seem to be prepping for iPhone 5S builds to start in March. iPad 4 builds continue to fall (7-10M to 3-5M) and mini builds continue to rise (10M to 11-13M). While we believe the GM is similar, the actual gross profit dollars are lower on the mini [�] We see them as on track for a targeted June launch. There could be risk of a delay until July, but we see that as unlikely at this point due to few changes for the iPhone 5S vs. the iPhone 5 and that builds are scheduled to commence in March. We expect launches at China Mobile (~700M subscribers; 85M 3G) and DoCoMo (60M) in June/July. We think the China Mobile launch will be focused on the low-cost iPhone while the DoCoMo launch will be focused on the 5S.
Despite Tim Cook‘s disparaging remarks yesterday about displays using organic light-emitting diodes, OLED is potentially one of the display technologies for a larger “iPhone 6” that may be delaying the arrival of such a device, opines Misek, although another possibility is the “IGZO” technology from Sharp that has been rumored for some time to be of interest to Apple:
We believe a summer CY14 launch was originally planned, but Apple tried to accelerate it to stem its market share losses. The earliest Apple could have launched a 4.8� phone would have been this fall (with a target of Oct); however, our checks indicate that Apple�s suppliers are running into difficulties trying to scale the screen size from 4� to 4.8�. We believe Tim Cook defended the 4� screen of the iPhone 5 on the last earnings call in order to avoid freezing iPhone shipments in the quarters before a 4.8� launch [�] We think in- cell is having difficulty ramping to 4.8�, which is making Apple look at switching to on-cell (a different integrated touchscreen technology) and OLED (despite Apple�s suppliers being well behind Samsung in their OLED capabilities) or IGZO.
Misek also offers that when an iPhone 6 finally arrives, it may come with a gross margin two points lower given higher component costs:
Apple has been able to add functionality by using NAND price declines to subsidize other costs. For the iPhone 4S we estimate the 16GB NAND cost declined by $8 and declined by $9 for the iPhone 5 in contrast to app processor + baseband/power amps + display + assembly increasing $14/$17 for the iPhone 4S/5. We think Apple will reap some GM improvements from the little-changed iPhone 5S, but we expect the iPhone 6 to have a pricier app processor (mainly due to the TSM transition) and display (due to poor 4.8� in-cell yields) combined with limited NAND price declines (due to industry consolidation, Moore Stress, and price-inelasticity), which will lead to a 200bp+ headwind for the iPhone GM.
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