Why Apple is down below $400, and is still a very good thing

Today Apple stock dipped below $400, and is down about 5% as I write this. Yes, the overall market is down today. But Apple is down a lot more than normal. The reason? Cirrus Logic, a supplier of audio chips to Apple, warned today. To “warn” is Wall Street speak for press releasing preliminary results that are crappier than people expected.

In a nutshell, Cirrus has a major customer transitioning to a new product, and this is causing the chip supplier to write down a bunch of inventory. Cirrus just wrapped up its March quarter, but the real issue surrounds the upcoming June quarter. That’s because as part of its press release, Cirrus is warning investors that June quarter revenue will be only $150-170 million compared to Analyst estimates above $190 million.

Here’s the exact wording from the Cirrus Logic press release that has people freaking out:

“The company also announced that it will record a total net inventory reserve of $23.3 million of which approximately $20.7 million is due to a decreased forecast for a high volume product as the customer migrates to one of Cirrus Logics newer components.”

So let’s break this down a bit. Cirrus has a major customer who no longer expects to purchase certain old generation product, and is instead transitioning to a new generation of product. As a result of this, Cirrus is writing down the value of the product.

If you’re wondering why Apple stock is tanking because of this, no, there is nothing wrong with how your brain is functioning. I don’t think the Cirrus warning says anything specific about Apple’s sales. But Wall Street will speculate, worry, and trade based on all of this, and that’s why the stock is tanking.

For all we know, Cirrus has a new product that is about to be released, and Apple’s manufacturing partners have enough inventory of the older part to get them through until the part transition is complete. We have no idea how much of this old part exists in the supply chain. We have no idea if Apple is transitioning a part within its existing iPhone and iPad lineup or if they’re doing a component transition to line up with a new model.

Could Apple be about to post weak results? Yes, it’s possible. In fact Apple stock already took a beating as Hon Hai (aka Foxconn) reported weak results for the month of March as reported by the Wall Street Journal. So this release out of Cirrus Logic is what I’d call mounting circumstancial evidence of a possible problem rather than strong, convincing evidence. But investors and analysts are nervous about Apple, and whenever a major coughs, Apple is going to catch the latest Avian flu.

Apple is currently a stock that has negative sentiment. That doesn’t mean results are problematic, or that the business is in any kind of trouble. But it does mean that in the short term, anything that could possibly be interpreted as bad news will be. And the stock will suffer.

That's life. As an investor, I just deal with it. Apple’s position in the mobile industry is still far stronger than it ever was in the PC market. Long term, this is a very good thing.