Don't Sell Apple Stock on Those iPhone Production Cut Reports

Let's be clear: Investors should not sell Apple stock based on worries about slumping iPhone 7 sales.

The Nikkei Asian Review triggered this latest episode of hand-wringing over Apple Inc. (Nasdaq: AAPL) stock. In a Dec. 31 report, Nikkei said the Cupertino, Calif.-based tech giant would trim its iPhone 7 production by 10%. The estimate is "based on data from suppliers."

Trump’s impact on Apple stockOther news outlets were quick to repeat the story. Most also pointed out that Apple cut production of the iPhone 6s by 20% a year ago due to excessive inventory.

Some of the headlines were downright glum. "The iPhone 7 may not be selling as well as Apple hoped," warned Engadget.

That's the sort of headline that gets investors wondering whether they should sell AAPL stock.

Such media chatter immediately raises questions about the health of Apple's overall business. The iPhone, after all, accounts for about two-thirds of the company's profits.

But it doesn't mean that selling Apple stock now is a good idea...

Why Investors Shouldn't Sell Apple Stock on iPhone News

Even assuming the Nikkei report is true (it has a solid reputation), a 10% cut in iPhone 7 production doesn't necessarily mean it's selling more slowly than the iPhone 6s.

According to current FactSet estimates, the iPhone 7 is expected to outsell last year's iPhone 6s in both the December quarter (Apple's fiscal Q1) and the next two quarters.

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Last year Apple sold 74.8 million iPhones models in its Q1. FactSet is forecasting sales of 78 million units of the iPhone in the just-ended December quarter.

In Q2 2016, Apple sold 51.2 million iPhones. The FactSet estimate for Q2 2017 is for sales of 54 million iPhones. In Q3 2016, Apple sold 40.4 million iPhones. The FactSet consensus predicts 43 million iPhones will be sold in Q3 2017.

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So things aren't as dire as the headlines suggest.

It's also useful to remember that Apple continues to vacuum up virtually all of the profits in the global smartphone market despite its modest 13.2% share of unit sales.

According to BMO Capital Markets, Apple collected 103.6% of the world's smartphone profits in the third quarter of 2016. (Apple can exceed 100% because of perennial money losers like manufacturers HTC and LG.) Samsung was a very distant second with 0.9% of the profits.

That alone is a strong argument for investors not to sell Apple stock. But while Apple stock may trade sideways in the near term, there's a good reason to expect AAPL to pop later in 2017...

Why AAPL Stock Will Have a Profitable 2017

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While the last two versions of the iPhone haven't made the kind of huge splash the iPhone 6 did with its larger screen sizes, that's going to change when this year's model debuts in September.

You see, this year is the 10th anniversary of the iPhone. Apple is thought to have saved multiple big changes for this model, including new display technology, long-range wireless charging, a screen that runs edge to edge, and new biometrics such as facial or iris scanning.

Several analysts have predicted that 2017 will launch an iPhone "supercycle" in which millions of those still hanging on to older versions of the iPhone will rush to upgrade.

While the respectable-but-not-stellar sales of the iPhone 7 will keep Apple stock treading water for most of the first half of the year, an increasing media focus on the iPhone 8 will start to push AAPL shares higher come summer.

By then, the stories about Apple supplier stocks will be talking about Apple's accelerating demands, not cutbacks.

And Wall Street will start looking more closely at Apple's projected 2018 earnings, which according to FactSet will rise to $10 a share. That will push AAPL stock toward $140, a 20% gain from the current Apple stock price of about $116.

Up Next: The next iPhone won't just jumpstart Apple stock - it will boost the stocks of many of Apple's suppliers. The Apple suppliers with the most to gain are those with the most exposure to Apple - especially these seven companies...

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About the Author

David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.

Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.

Dave has a BA in English and Mass Communications from Loyola University Maryland.

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