January 15, 2013

Yesterday, Wall Street Journal’s claim that Apple had “halved” orders for iPhone 5 displays has caused a few stirs around here. Are the claims founded on fact or was it a cheap attempt to manipulate Apple’s stock before the earning’s call on January 23rd? Let’s have a look at the facts.

Disclaimer: I own a small number of Apple shares.

Firstly, to those who are waiting for an official response from Apple about these rumours, Jim Dalrymple on why Apple can’t respond to rumours of iPhone 5 cuts even if it wanted to:

SEC rules prohibit Apple from talking publicly about the company. This is known as a quiet period and all publicly traded companies must adhere to these rules.

The Wall Street Journal can publish more of its “according to a person familiar with the matter” and there isn’t a lot Apple can say.

Verizon in the US announced last week that had a strong holiday quarter:

Verizon this morning said in a filing with the SEC that its Verizon Wireless unit expects to report Q4 retail postpaid subscriber net adds of 2.1 million, with 9.8 million smartphone activations, and “a higher mix of Apple smartphones.”

Same with AT&T:

AT&T announced today that it sold more than 10 million smartphones in the fourth quarter of 2012, topping its previous record quarter of 9.4 million, set in the fourth quarter of 2011. This included best-ever quarterly sales of Android and Apple smartphones.

Michael Grothaus at TUAW speculates that Apple could be releasing a new iPhone on a six-month schedule:

Apple usually reduces component orders when they are getting ready to ramp up for a new product. There have been rumors that Apple will move to a six-month release schedule for its iOS devices to keep up with competition. The lower component orders could signal that an “iPhone 5S” can be expected sooner rather than later.

Although as John Gruber points out, a new iPhone is almost certainly going to use the same display as the iPhone 5.

BGR expands on the questionable maths used to reason that Apple cut display orders in half:

So if the most likely number of 4-inch screens Apple is reasonably expected to sell in March quarter is around 30 to 40 million units, why did Nikkei publish a report stating that Apple had halved its display orders for the quarter from 65 million units? Nikkei was quite specific about the 65 million number. And it clearly tied it to iPhone 5 component orders, not total iPhone or iPhone 5 and iPod touch orders.

In what world did Apple expect to order components for 65 million iPhone 5 handsets in the seasonally soft March quarter?

Perhaps the weirdness of the math is why the current version of the WSJ article no longer cites the 65 million unit figure. Sometime between Sunday at 8:00 p.m. EST and Monday at 7:00 a.m., the Journal decided to drop the number from its article. But if the 65 million number is not right, is the estimate for halving March orders correct?

And finally from November last year, Joe Springer from Seeking Alpha expands on the incentives for keeping Apple’s stock price low until at least January 19:

What kind of money are we talking? Let’s use the more than 60,000 calls with a $600 strike price. If Apple goes to $700 before January 19, then those options have an intrinsic value of:

60,000 (call options) X 100 (shares per option) X $100 (intrinsic value per share) = $600,000,000

Six hundred million dollars not in the institutional call writers’ pockets. Whereas, if Apple stays put, then runs to $700 after the expiration date, the call writers get the capital gain from the common stock they covered with, AND the entire amount for which they sold the option. And this is only one strike price we calculated - together this is billions of dollars for a two month delay in an Apple surge.

But now, however, the gains of the Summer have come back in and Apple’s share price has only to stay flat for the next two months for all those call options to expire worthless. The institutional money managers that wrote those options, if they were to try to manipulate Apple’s share price, have a lot of incentive to keep Apple in place for a short time, then drive it higher.

So there you have it. There may be some truth in the Wall Street Journal’s claim that Apple has cut orders for iPhone 5 displays, and (going against all previous experience) Tim Cook might have been wrong about iPhone demand. But given that the foundation of this story is over a month old, the history of unreliable supply chain rumours, and the huge incentives to manipulate Apple’s stock to keep it low until a few days before the next earnings call, I know which theory I believe.

Weiran Zhang

Written by Weiran Zhang who lives and works in Nottingham. You should follow him on Twitter.