Apple iPhone 6: Ignore Today's 68 Million Number

iPhone 6 mockups. Source: 9to5Mac.

Another day, another rumor about Apple's upcoming iPhone 6. The latest is from Taiwan's Business Weekly, which is making the rounds today. According to the report, Apple is betting huge on the iPhone 6, and has initially ordered 68 million units. That figure is purportedly twice as many units compared to the iPhone 5.

While Apple bulls like myself should love big figures like that, investors shouldn't put much weight into supply chain leaks of this nature. In fact, Tim Cook has directly advised investors not to pay attention to these types of rumors.

Stop me if you've heard this one before
Back in January 2013, the Wall Street Journal reported that Apple was cutting iPhone 5 orders from 65 million to 50 million. However, that 65 million figure was absurdly high to begin with. Still, that didn't stop the report from creating investor panic, as shares dropped on the news.

The reality is that Apple's global supply chain has countless moving parts and many vendors. It's not uncommon for one crucial ingredient to create production bottlenecks, particularly if that component involved an advanced new technology, and is still plagued with low yields. In 2012, this was the in-cell touch display in the iPhone 5. In 2013, this was the Touch ID sensor in the iPhone 5s.

As yields improve, Apple frequently adjusts its open orders at suppliers, and most of its orders typically cover up to 150 days. This paragraph is in every Apple 10-Q and 10-K:

These outsourcing partners acquire components and build product based on demand information supplied by the Company, which typically covers periods up to 150 days. The Company also obtains individual components for its products from a wide variety of individual suppliers. Consistent with industry practice, the Company acquires components through a combination of purchase orders, supplier contracts, and open orders based on projected demand information. 

This is a possible explanation for why that 65 million figure from 2013 seemed so high. It's because Apple over orders when yields are low, and then reduces orders when necessary. Just like the old saying goes, Apple would rather have it and not need it than to need it and not have it. 

While there's a distinct possibility that the 68 million figure is accurate, that doesn't give investors much actionable information. Here's the Tim Cook quote from the conference call back in January 2013 directly addressing the WSJ speculation:

I would suggest it's good to question the accuracy of any kind of rumor about build plans and also stress that even if a particular data point were factual it would be impossible to accurately interpret the data point as to what it meant for our overall business because the supply chain is very complex and we obviously have multiple sources for things, yields might vary, supply performance can vary. The beginning inventory positions can vary, I mean there is just a long list of things that would make any single data point not a great proxy for what's going on.

To be clear, I do hope that Apple is preparing for a massive launch, as the expected move to larger displays will dramatically broaden Apple's addressable market considering the secular shift in consumer preference toward big phones. Rather, I'm just not going to pay attention to numerical supply chain leaks around possible Apple orders or build plans. That's Tim Cook's job.

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Evan Niu, CFA owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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