Apple cuts iPhone 5C production. Good news for shareholders?

Apple's reportedly cutting production of its low-cost iPhone 5C, but raising production for its higher-end, higher-margin iPhone 5S. Apple stock rose after the report from the Wall Street Journal.

Adrees Latif/Reuters/File
Apple iPhone 5C phones are pictured at an Apple retail store. Apple is bringing iOS to car dashboards with CarPlay.

The Internet is buzzing with speculation about Apple after the company reportedly reduced orders with manufacturers for the recently released iPhone 5C.

Did Apple just fail? Is Apple losing the smartphone game? If that's true, however, why did Apple's stock rise after the report came out?

Lower than expected 5C sales aren’t bad news for Apple. As Apple’s cheapest phone ($99 with contract), the 5C brings less revenue than other models. In fact, had the 5C really taken off, it could have hurt Apple's margins since previously high-end customers might have gone for the cheaper model next time they bought a phone.

Instead, sales of Apple's high-end and higher-margin iPhone 5S ($199 with contract) are taking off. Apple’s online store sold out of the 5S within 48 hours of sales and they are still on back order at many retailers.

While Apple has decreased production of the 5C, it has also asked one of its largest suppliers to increase production of the 5S, according to the Wall Street Journal, which first reported the production cuts Wednesday. Apple's stock price closed up $2.40 per share, or 0.5 percent.

“The demand for the new iPhones has been incredible, and while we’ve sold out of our initial supply of iPhone 5S, stores continue to receive new iPhone shipments regularly," Apple CEO Tim Cook n Apple’s first weekend sales press release following the launch of the iPhone 5 series. "[W]e’re working hard to build enough new iPhones for everyone.”

The intentions behind the 5C were clear – it’s cheap, it’s colorful, it’s cute. But the Apple that consumers know is high end.

"I don't subscribe to the common view that the higher end, if you will, of the smartphone market is at its peak," Mr. Cook said during Apple's last earnings call in July. "I don't believe that."  

Also, the "failure" of the 5C is in the eye of the beholder. The 5C sold well compared with other phones. It just failed to meet the market's high expectations for Apple.

The company shipped 11.4 million 5Cs in the September quarter, according to KGI Securities analyst Ming Chi Kuo, quoted in AllThingsD. While the 5S managed to be September’s top-selling smartphone at all four major U.S. carriers – AT&T, Verizon, Sprint, and T-Mobile – the 5C still finished second at two of the major carriers and third at the others, according to Canaccord Genuity tracking data.

The reasons for Apple’s supply changes will probably be addressed at Apple’s news conference to be held Oct. 22.

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