Apple's share price dipped below $500 per share in trading on Monday after a Wall Street Journal story on Sunday evening claimed that the company had halved its component orders for the iPhone 5. AAPL closed at $501.75 on Monday night. The decline means that Apple has lost around $200 pre share since 21 September. Most shocking of all: the report includes inaccuracies which WSJ later removed; this was an old story that broke (and was covered by Macworld UK) last December; and call options written this summer are due to expire on 19 January – suggesting that there may have been some stock manipulation.
Apple isn't the only stock to have suffered.The news also hit Apple's partners including Qualcomm, Broadcom, Cirrus Logic, and Avago Technologies.
The Wall Street Journal story was based on a report on Japan's Nikkei that claimed that Apple asked its display manufacturers including Sharp and LG to cut orders by 50%. According to the report Apple's original order was for 65 million, this is one of the details the Wall Street Journal later removed from its report, along with the claim in its headline that the reduction was down to slow demand.
Nobody expected Apple to sell 65 million iPhones
Claims that Apple had halved its display orders for the March quarter remain, the report just no longer mentions that this is apparently based on an original order of 65 million units.
The crucial fact that the WSJ appears to have recognised too late is that nobody expected Apple to sell 65 million units in the March quarter. Nobody even expects Apple to sell that many iPhones in the just gone Christmas quarter, which is traditionally Apple's busiest, compared to March, which is seasonally quiet.
As we reported yesterday, analysts expect a maximum of 63 million iPhone sales in the quarter that ended on 31 December (and a minimum of 43 million). Apple will report these figures on 23 January.
Wells Fargo analyst Maynard Um (who expects 43 million iPhone sales in the March quarter) describes the 65m number as "unrealistic," claiming: "The likelihood that Apple would have shipped 65 million iPhone 5s for the March quarter would have been minuscule, in our opinion", writes AppleInsider.
"In what world did Apple expect to order components for 65 million iPhone 5 handsets in the seasonally soft March quarter?" writes BGR.
"If the 65 million number is not right, is the estimate for halving March orders correct, either," BGR's Tero Kuittinen writes.
An old story that's not news
One of the most curious things about the stock falling after the WSJ story broke is that it's old news, as we mentioned yesterday when we referred to it in our round up of analyst expectations for apple's Christmas shopping quarter.
We wrote the following stories about the supposed reduction in parts orders before Christmas:
On 17 December we reported that Citigroup analyst Glen Yeung had claimed that Apple has cut back orders from its iPhone part suppliers and that Jefferies analyst Peter Misek claimed that Apple has cut its component orders because it over-ordered for this quarter. Fubon Financial Holding Co analyst Jeff Pu is also cautious about Apple's supply chain, noting "weaker than expected demand".
On 18 December we examined Apple analyst Horace Dediu of Asymco's suggestion that Apple is moving to an update cycle of more than once a year, hence the cut back in orders for the iPhone 5.
UBS analysts Steven Milunovich, Peter Christiansen and John Roy noted that the WSJ report was an old story. "The article says Apple notified suppliers of the cut last month, which is when we and most of the Street reported it. Consequently, it appears this is old news – our analysts indicate no changes since." Milunovich, Christiansen and Roy expect iPhone sales of 45 million for the December quarter, notes Marketwatch.
AAPL Stock manipulation
So why did an old story, that was based on questionable figures, have such a negative effect on Apple's share price yesterday?
JP Morgan's Mark Moskowitz dismissed the report as "not news" and categorized it as "more noise" that will fuel an investor overreaction writes AppleInsider. An investor overreaction is what appears to have happened – or is there something else at play?
"If you don’t smell stock manipulation here, I have a bridge to sell you," writes John Gruber on Daring Fireball.
A report Marco.org notes that back in November Joe Springer at Seeking Alpha wrote that there was an: "Enormous amount of call options speculation" related to Apple's "Summer surge". A lot of these calls had "a strike of around $550 and higher, "that expire January 19 2013".
In other words, a number of institutional money managers wrote call options last summer, and they could make a lot of money if the price remains below $550, at least until after 19 January.
[If our understanding is correct (and we aren't experts), a call option gives the holder the right to purchase 100 shares of a particular stock at a specified price on the options expiration date, or in some cases, at any time before the expiration date. So, if you had purchased one of these call options written in the summer you might have the right to purchase, say, 100 Apple shares at the price of $550. If Apple had remained at $700 you'd have been in the money by $150 a share, but with AAPL down at $500, the person who wrote the call option in the first place is the one laughing all the way to the bank].
We have been told that if this is correct, and fund managers have been writing call options and trying to keep the price below $500, this is potentially a case of market manipulation – which is illegal and punishable by a prison term in most countries.
The Seeking Alpha report explained: "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".
In a what may have been a premonition, Seeking Alpha's Joe Springer writes: "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." Concluding that, as a result, a good day to buy would be at the end of the day on Friday 18 January.
Why isn't Apple addressing this
It would seem that Apple is prohibited by SEC rules from making any comment on this story in the run up to its financial results announcement next week. "This is known as a quiet period and all publicly traded companies must adhere to these rules," writes Jim Dalrymple.
However, in response to that suggestion, MacRumors writer Eric Slivika Tweeted: "These quarterly earnings quiet periods are not required by SEC, notes iDownloadblog.
Regardless of whether Apple should have the right to reply in this case – if it was even the kind of company to respond to such claims (which it isn't), one report sums up the issue thus: "Shouldn’t we also have rules in place preventing such blatant stock manipulation based on false and vaguely sourced newspaper articles", asks iDownloadblog.
What might the decline in iPhone part orders really mean?
As we wrote in December, the reason for any reduction in component orders could be due to a number of more positive reasons. Apple may be winding down production of the iPhone 5 because it is about to launch the iPhone 6 or iPhone 5S – one theory is that in order to compete with the likes of Samsung, the company needs to move to a half-yearly production cycle, as it has with the iPad.
Mark Moskowitz of JP Morgan Moskowitz believes the order cuts indicate that iPhone 5 manufacturing yields - and the important gross margins - are improving, writes AppleInsider.
That analyst suggests that "the potential order cuts are a direct result of manufacturing yields improving following the fast-and-furious product roll-outs of the iPhone 5 as well as new iPads and Macs."
It's not only APPL that is falling
Yesterday Wall Street ended flat and the dollar hit an 11-month low. There were a number of other reasons for this fall.
US President Barack Obama discussed the USA's debt and tax issues at a press conference and federal chairman Ben Bernanke spoke about the Fiscal Cliff deal, suggesting that while it had made "some progress" in resolving the nation's debt problem, the nation is not out of the woods yet, writes Moneycontrol.
As we have been reporting since November, much of the mass sell off of Apple's stock appears to have been driven by the fiscal cliff, specifically the expiration in January of tax cuts implemented by Bush.
Whatever the reason for the decline in AAPL shares yesterday, if the report on Wall Street Journal is in any way responsible, those "who perpetrated it must be taken to task, held accountable or whatever ends up necessary in this case", writes The Street.
"You can't just come out with half-cocked reporting, move a stock and its derivative plays, call it a day's work and then go do it all over again next week. At least you shouldn't be able to when the hard-earned money of retail investors is on the line".
"Where's the Securities and Exchange Commission when you need it?" concludes that report.