Here’s Why the Market Is Wrong on AAPL Stock
An old news headline on Apple Inc. (NASDAQ:AAPL) is once again sending jitters across the market, as AAPL stock faces another big sell-off. But hold your horses! There’s more to the story than what meets the eye.
It is being reported that the company is cutting back production of its latest “iPhone” models—the “iPhone 6s” and “iPhone 6s Plus.” (Source: “Apple Scales Back Orders for Its iPhones,” The Wall Street Journal, January 5, 2016.)
The reports are saying that Apple is facing an inventory buildup for the iPhone 6s and 6s Plus models. To put it in other words, Apple produced more than it needed and is now holding off on further production. But, wait! Didn’t we hear this news back in December?
Forget the Apple Bears
Mid-December, when Morgan Stanley’s Apple bull Katy Huberty first reported of supply-chain cuts due to inventory buildup, the stock took a big hit. This time around, only a confirmation of the same has come, but the stock is almost crashing. It beats me why Mr. Market is selling off on old news that’s already baked into the stock’s price—especially when the news is not all that bad.
Let me help you understand why the market has gotten it wrong this time.
Up until the “iPhone 4,” Apple was launching one model a year. Then came the “iPhone 5.” Beginning with “iPhone 5s” and “iPhone 5c,” Apple launched two models a year. But seeing that the iPhone had become its biggest revenue-driver, Apple went all in on this product.
Within the last year alone, Apple has launched two installments in the iPhone 6 series for a total of four new phones! And Apple isn’t done with the 6 series just yet. The third installment, “iPhone 6c,” is rumored to hit the market in three months, followed by the next big installment, the “iPhone 7,” which is expected in the last half of this year. So basically that comes to five new phones released in the span of a year! For an average smartphone buyer, that’s a lot of new iPhones to choose from.
How many upgrades can you have in such a short time frame?
I know at least two people who haven’t upgraded from their iPhone 5s and iPhone 6 in wait of the smaller iPhone 6c that’s rumored to be released soon. It’s a matter of personal choice and Tim Cook is only ensuring that Apple fans have a plethora of options to choose from.
Clearly, the inventory buildup of the latest two phones doesn’t in any way indicate a threat to the company, whose older models continue to enjoy solid sales and soon-to-be-released models already boast anticipatory demand. Ultimately, what will matter is how many total iPhones, not individual models, were sold by year-end.
Tim Cook’s decision to keep production levels for the latest phone at stable levels until they are sold out in stores and while the new phone comes out is rather a sensible one. I don’t see why Mr. Market has taken it to be negative and blown it out of proportion.
I, for one, welcome the CEO’s very calculated move to use the company money more prudently.
The Bottom Line on AAPL Stock
Betting on AAPL stock has never been an easy business. It wouldn’t be wrong to label it as the most speculative bet on the market, while Apple remains the most profitable company in the world’s biggest economy.
The latest sell-off is a classic example of what Peter Lynch defines as a “lemming-like” behavior, where one after the other, investors dump their investments in a frenzied manner in fear of a crash. In times like these, find solace in the legendary investor-turned-billionaire, Warren Buffett’s words: “Be fearful when others are greedy and greedy when others are fearful.”