Apple's shares dropped on the last trading day of 2016 as Nikkei Asia Review revealed the production cut numbers of the newest iPhone line planned for Q1.
The stock closed the last trading session late Friday 0.9% lower after the report issued by Nikkei Asia Review said that the company was facing an oversupply problem with its newest iPhone 7 models. According to the report based on supplier data, the iPhone 7 production volumes will be trimmed by as much as 10% in January-March quarter due to more sluggish than expected sales.
The news coming in the middle of the holiday shopping period, normally the busiest time of the year for Apple's (NASDAQ: Apple [AAPL]) sales, immediately disappointed the investors, what was reflected in a drop of the stock price of Apple and its suppliers. On top of cutting the production by 10%, Nikkei mentioned that Apple had to start the initial production of iPhone 7 that was introduced in September by lowering the production volumes by 20% to avoid the accumulated inventory yet again. Nikkei's report echoes the situation Apple found itself in last January when its iPhone 6s model did not sell good enough leading to an oversupply problem for the first time in history of iPhone sales.
After missing on earnings for the first time in more than a decade in the first quarter of 2016, Apple CEO Tim Cook had to reply to the investors worried about the future of the iPhone sales:
"We are very optimistic that this too shall pass and that the market, and particularly us, shall grow again. The future of Apple is very bright, our future product pipeline has some amazing products," Cook told Wall Street analysts in April.
Back then, iPhone sales dropped to 51.2 million devices from 61.2 million in the same quarter one year before. With the production cut numbers suggested by Nikkei Asia Review, it seems like the situation might repeat itself this year, warn some analysts. For the first quarter of 2016, the analysts predict 55 million iPhones to be sold, says CNBC.
However, adds Nikkei, one of the models of the iPhone 7 line, iPhone 7 Plus, has managed to show some impressive sales results thanks to its new upgraded camera, although Apple struggled to meet the increased demand for this model during the busy holiday period due to the shortage of special camera sensors. This also reflects the underlying problem of the sluggish iPhone 7 sales as a lot of customers felt that the new model did not offer enough new appealing features, except for the advanced camera in the 7 Plus, that would be enough to convince them to make an expensive upgrade to the lastest version.
However, iPhone 8 has been lately rumoured to feature flexible curved OLED screens, which would be a big jump forward for the iPhone line, technology-wise.
"As people wait for the next versions of the iPhone to come out — particularly with the iPhone 8, there may be some demand that gets pushed forward — you're going to see a weak first half of 2017," a technology analyst Colin Gillis told CNBC last week.
Even though iPhone 8 could push demand forward for Apple, it is still 9 months to go until the new model will hit the market. But investors shouldn't necessarily prepare themselves for a sluggish performance until then, says Barron's. Indeed, production cuts of the company's main income-generating product does sound worrisome but the latest trends show that Apple is rapidly growing other sources of income such as its services business. Barron's experts say that Apple's ecosystem that consists of App Store, Apple Music and iTunes has already grown 24% in the last quarter, though it went largely unnoticed as most people still pay attention to the amount of sold iPhone units.
So, if Apple manages to boost its services business even further, it essentially doesn't matter which model of iPhone customers use as long as they still buy music on Apple Music or purchase another app from the App Store. This could help lessen the negative influence of sluggish iPhone sales on Apple's earnings performance in the future.