Too Early to Sell Apple on 4S Slowdown Rumors, Sticking with $500

According to a recent report by a Taiwanese newspaper, Apple (NASDAQ:AAPL) has been seeing a slowdown in its iPhone orders even as Amazon (NASDAQ:AMZN) continues to see strong demand for its Kindle Fire tablet offering. Apple has apparently informed upstream suppliers of parts and components for iPhone 4S to delay part of their shipments for the fourth quarter of 2011 to the first quarter of 2012 as sales of the iPhone 4S have not been as strong as those concluded in the pre-sales period and also due to shortages in the supply of some key components. ^[1] This report comes as a huge surprise given that the 4S was the best-selling smartphone in October for Verizon (NYSE:VZ), AT&T (NYSE:T) and Sprint (NYSE:S) despite only being available for half of the month.

Normally a Teflon stock, Apple has slide over 5% in the last two days since the news. The iPhone is significant and accounts for over half of our price estimate. We maintain our price estimate of $502 for the Apple stock, which is about 30% above market price.

See our complete analysis for Apple stock here

Too early to raise alarm bells on iPhone demand

While it is no doubt a worrying sign of a possible weakening of demand for the iPhone, it is possible that the reduced orders, if true, may be related more to Apple “pulling back its typical over-ordering of components” to secure availability for the upcoming holiday season. ^[2] According to a report from SlashGear, the recent Taiwanese flooding may also have had “an impact on certain components Apple relies on, forcing the company to reduce orders of other iPhone parts so as to match its potential production.” ^[3] In either case, we do not think that demand for the iPhone is a concern as much as probable component shortages.

iPad Slowdown more likely

It is more likely that Apple has reduced shipment of supplies for its iPad 2 and not the iPhone 4S due to a short-term market saturation and a possible shift of market dynamics to the much cheaper 7-inch Kindle Fire, that has led to low orders for the tablet. A study by Retrevo.com seems to suggest that more consumers are interested in purchasing Amazon’s upcoming tablet than Apple’s tried and true iPad this holiday season. ^[4] Pre-orders for Amazon’s tablet remain strong and the company seems to have recently increased its orders to more than five million units before the end of 2011. ^[5]

This could mean that we are seeing first legitimate threat to the iPad. It also means that in order to compete with the iPad, a company should be willing to take a significant cut to its margins. We do not see a 7-inch tablet posing a big threat to the iPad in the long-run; however, Apple may well need to do a rethink on the iPad price as tablets see mass adoption and the market matures to include more price-conscious customers.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Apple slashes parts and components orders for 4Q11, Digitimes quoting a Chinese-site Commercial Times, November 9th, 2011 [↩]
2. Claims of weakening demand for Apple’s iPhone 4S disputed, AppleInsider quoting RBC analyst, Nov 2011 [↩]
3. iPhone 4S production supposedly slashed over demand/supply issues, SlashGear, Nov 2011 [↩]
4. Kindle Fire could be hotter than iPad this holiday season, BGR, November 10th, 2011 [↩]
5. Amazon increases Kindle Fire orders, DigiTimes, November 10th, 2011 [↩]