Apple Inc.(AAPL) may see supply constraints for key components required in its newly released iPad2 as Japan is still reeling from the disastrous earthquake and Tsunami that hit the country on March 11, 2011, according to research firm iSuppli.
Apple’s iPad2 has five components that are exclusively sourced from Japanese companies including NAND flash memory chips made by Toshiba Corp., dynamic random access memory (DRAM) from Elipda Memory Inc. AKM Semiconductor Inc. supplies the electronic compass, the touch screen outlay glass comes from Asahi Glass Co. and the system battery is imported from Apple Japan Inc.
Many Japanese manufacturing facilities halted production following last Friday’s massive earthquake and the subsequent Tsunami while the units that did not stall production are bound to face difficulties in procuring raw materials and distributing finished products. Flash memory manufacturer, Toshiba Corp. shut down a flash memory manufacturing unit in Japan and is likely to face distribution problems.
Apple had scheduled the iPad2 launch in Japan on March 25, but later changed its plans as the Tsunami reports started coming in. Last year, Japan contributed 6% to the total sales for Apple and presently it has seven stores in Japan. Apple has been forced to close down its store in Sendai due to the natural disaster.
In the US, Apple witnessed robust iPad2 demand and the analysts estimate that more than 1 million iPad2s were sold in the first week of launch, before retail outlets ran out of the tablet-style device since its arrival on March 11.
iPad2 was also available online at Apple’s website, expected to be delivered to customers in less than a weeks’ time. However, due to the exceptionally strong demand and now probably due to the component shortages, Apple has extended the delivery time to up to five weeks for online orders.
According to one analyst, Piper Jaffray, Apple’s profit margins could get affected in the second half of 2011, as the shortages push up component prices. However, Apple’s pre-paying policy for essential components to ensure a guaranteed and timely supply and pricing could help moderate the supply issue.
We believe that strong demand for iPad2 will provide Apple a competitive edge, as competitors, including Motorola Mobility Holdings Inc. (MMI), Samsung Electronics Co., Research In Motion Ltd. (RIMM) and Hewlett-Packard Co. (HPQ) continue to introduce tablet computers to compete with iPad2. According to consultancy firm PRTM, there are 102 tablets from 64 makers either on sale or in the development stage.
Despite the minor glitches and temporary supply issues, iPad2 is set to be a major revenue contributor for Apple, in our view. Apple is bent on protecting its share in the tablet market through the launch of iPad 2.
We continue to believe that Apple will outperform its peers given its strong iPad and iPhone sales and new product launches. The company is set to benefit immensely from the newly-launched iPad2.
Thus, we have an Outperform rating on Apple over the long term. Currently, Apple has a Zacks #2 Rank, implying a short-term Buy rating.
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