Thursday, June 14, 2018

Apple New Highs But Not Their Suppliers

Can Apple (NASDAQ:AAPL) do well while their suppliers suffer? The answer is yes for two reasons. For one Apple's inventories are up big year-over-year and two Apple's bringing some production in-house.

So the normal trade of buying the suppliers on the cheap because Apple's doing well may not be as clear as in the past.

High Apple Inventories

On Apple's most recent earnings report inventories rose from $2.91B to $7.66B year-over-year for the March quarter, an increase of 163%. Those high inventories imply less need to buy from their suppliers in the future.

Apple was asked on their conference call about the inventories. They answered the high inventories "should unwind over time."

Over time? That tells me higher inventories are not going to get fixed right away.

Apple suppliers could suffer.

Bringing Components In-House

Apple's growth in Research and Development (R&D) has been accelerating.


Jun Sept Dec Mar

Q3 Q4 Q1 Q2A
FY 2017 2017 2018 2018
Cal Yr 2017 2017 2017 2018
R&D 2937 2997 3407 3378
Growth 14.7% 16.6% 18.7% 21.7%

Above you see each quarters R&D has grew faster than the prior quarter. Much of that is Apple innovating to bring component production in house.

We spoke with Apple and think they are excited about moving production such as processors, batteries and displays in-house. They say it reduces costs and accelerates time-to-market.

This hurts their suppliers.

Apple Supplier Chart
Source
Apple New Highs, Not Their Suppliers

That may explain the performance disconnect. Apple's stock has been hitting all-time highs but its suppliers have not.

Conclusion

A slow, gradual wind-down of their excess inventories along with bringing production in-house will likely continue to be a headwind for their suppliers "over time."


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We have no positions of the stocks mentioned.

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