JPMorgan Talking Worst Of Apple Watch 'Yield Issues'

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In a report published Friday, JPMorgan analyst Gokul Hariharan discussed recent media reports surrounding a potential yield issue for
Apple Inc.'sAAPL
Watch product and the potential impact on the supply chain. According to Hariharan, early supplies of the Watch are likely to remain constrained due to initial yield challenges, while post launch in April, end-demand will likely be the gating factory. The analyst continued that contrary to prior expectations of three million to four million shipments in the first quarter, Apple's supply chain will only be able to deliver one million to 1.5 million units. Hariharan noted that the key issues stem from Taiwan based
Quanta Computer Inc
who has been struggling with labor shortages in Shanghai in January and February. As a result yields have stayed at around 50 percent to 55 percent levels – short of Apple's threshold requirement of 70 percent. In addition, there have been unexpected difficulties in the water-proofing process and final testing. Nevertheless, supply will likely rise to a three million plus per month level in the second half of 2015. "The worst of yield issues are already priced in for Watch supply chain and the next checkpoint would be demand in April," Hariharan wrote. "We expect Quanta's 1Q15 to be dragged down by higher costs due to increased labour charges and yield losses, but momentum should pick up from 2Q15. For ASE/ LG Display also, initial volumes remain lower, but shipments should see a pickup from April onwards." Bottom line, with iPhone demand likely to peak in the second half of 2015 while iPad demand continues to decline, the analyst is remaining positive on Apple's Watch vendors among the Apple supply chain.
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Posted In: Analyst ColorAnalyst RatingsApple WatchGokul HariharaniPadiPhoneJPMorganQuanta Computer
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