Attempt to link Foxconn's slowed growth to Apple viewed as questionableA suggestion that slow growth at manufacturer Foxconn could be a bad sign for Apple has been called out by one financial institution, which instead asserts that the connection between the two companies is limited.
Analyst Yair Reiner with Oppenheimer & Co. issued a note on Wednesday in reaction to an analysis released earlier in the day by a separate firm. That previous take downgraded AAPL stock over concerns that a deceleration in manufacturing at overseas device assembler Foxconn could be a bad sign for Apple.
Reiner said the conclusion reached by analyst Alex Gauna of JMP Securities might appear to carry weight at first, because Foxconn and Apple both accelerated in growth together. But with a closer look, Reiner feels the connection between Foxconn and Apple is not supported.
"Apple's contribution to Han Hai (which uses the trade name Foxconn) is limited," Reiner wrote. "The correlation between Apple and Hon Hai's revenue therefore appears to be a product of coincidence more than causality."
To support his theory, Reiner noted that Apple's contribution to Foxconn's $93.4 billion in sales in 2010 was about $20 billion, or just 21 percent of the company's total. Because Apple accounts for a "relatively modest portion" of Foxconn's revenue, the Cupertino, Calif., company is not seen as directly tied to Foxconn's momentum.
He also noted that assemblers like Foxconn are typically paid on a cost-plus basis, where the assembler purchases most of the components that will be used to build the final device, like an iPhone or iPad. A company like Apple then pays reimbursement for the purchased components, plus a single-digit margin for assembly services.
Reiner estimates that about 65 percent of Apple's $30 billion in "cost of goods" in 2010 went to Foxconn, while the rest went to component companies selling directly to Apple. Foxconn does not disclose revenue contributions from its customers.
Gauna and JMP Securities gained a considerable amount of attention Wednesday with their decision to downgrade AAPL stock. With a consistently strong performance and sales consistently exceeding expectations, it is one of the most generally supported stocks on Wall Street.
On Topic: Investor
- Apple R&D spend breaks $10B barrier in 2016 after $350M increase in Q4
- Wall Street positive on Apple's Q4 earnings, bullish on iPhone 7 holiday sales
- Revenue from Apple Music, Apple Pay & other Apple services jumps 24 percent in Q4
- Notes of interest from Apple's Q4 2016 conference call
- After first revenue decline in 15 years, Apple forecasts return to growth in holiday quarter