Tweet This
Apple fell over 4% this morning after two suppliers, Lumentum and Japan Display, cut their forecasts. We last saw this happen in April when Apple dropped 9% after companies that supplied parts for the iPhone X reported weak demand. John Archer, one of my managers, had an insight that justified buying Apple in the midst of the April panic at $165. Even after today's drubbing, that trade turned out very well, and the same insight applies now.
On April 29, John explained his insight in The Best Argument For An Upside Surprise From Apple On Tuesday. While Wall Street was focused on disappointing unit volume, they forgot that Apple significantly increased the price of the iPhone X.
Apple's revenues are the product of volume and price. Apple beat everyone's expectations for the first quarter because iPhone revenues basically hit their target as the higher price made up for the lower volume.
Apple's suppliers did not get a price increase, so they reported lower volume at the same price for their components which means disappointing revenues.
It's Happening Again
In September, Apple launched the iPhone XS and XS Max both of which are even more expensive than the iPhone X. The other new iPhone, the XR, is $50 more than the iPhone 8 it is meant to replace. At the same time, Apple discontinued the $350 iPhone SE.
Taken together, Apple will make more money on lower unit volume. Suppliers will just see lower volume. This will probably work for Apple as it did in the first quarter.
But Apple's suppliers are, once again, not going to get a price increase. They will be selling fewer units at the same price so it makes sense for them to guide expectations down.
My Take: Is it crazy to buy Apple when the market is having a panic attack?
It's not crazy if you understand the reason everyone is in a panic, and can explain why they are making a mistake.
However, it is a long time before Apple's next earnings report -- plenty of time for this panic attack to take Apple further down. I'm convinced the market is making a mistake on Apple, but I'm going to leave it up to John Archer to decide when to take advantage and buy more.
This article is part of a series I write for those who want to get their portfolios back on track. To be notified when the next installment is published, click here. To be notified when I write about specific stocks my top analysts cover click here.
