Why Apple And Its Suppliers Aren't Moving In Step

Can Apple Inc. AAPL do well while their suppliers suffer? The answer is yes for two reasons: Apple's inventories are up big year-over-year and Apple is 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 percent. Those high inventories imply less need to buy from their suppliers in the future.

Apple was asked on their conference call about the inventories. Their answer: 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.

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 and may explain the performance disconnect: Apple's stock has been hitting all-time highs while 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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