Edible Apple

Apple shares took a significant hit last week after JMP Securities Analyst Alex Guana downgraded the stock amid concerns of a manufacturing slowdown at Hon Hai. Seeing as Hon Hai, which owns Foxconn, is an important manufacturing parter of Apple, Gauana deduced that the slowdown must signify a slowdown in Apple manufacturing orders. In short, Gauana expressed concern that Apple would be unable to maintain the tremendous growth investors have gotten used to over the past few years.

Guana’s report was quickly viewed with skepticism due to the fact that Apple’s business only comprises about 20% of Hon Hai’s activities. That being the case, who’s to say that the manufacturing slowdown has anything to do with Apple at all? Besides, the unbelievable success of the iPhone 4 and the unprecedented demand of the iPad 2 all seem to run counter to Guana’s conclusion.

Apparently not one to back down, Guana recently sat down with the Wall Street Journal where he further fleshed out the rationale behind his downgrade of Apple shares.

When asked if he had any regrets about the downgrade, Gauana responded:

Deceleration in the company’s primary manufacturing partner, Hon Hai, was something that we wanted to make investors aware of and to that end we achieved our goal. Investors raised some valid questions around the potential that there may have been some seasonal pre-build ahead of the Chinese New Year, or that Apple supply chain diversification efforts could have accounted for the Hon Hai slow down.

While this is true, we have conducted research subsequent to our downgrade that clearly points away from a pre-build explanation and we simply do not see any evidence of diversified manufacturing activity of a scale that would explain away developments either.

“Given the high degree of correlation between the two companies in 2010,” Gauna continued, “the most probable explanation for a Hon Hai slow down of this magnitude is that it at least in part if not in its entirety reflects developments at Apple. Some have pointed out that the train wreck going on in other electronics verticals, for example PCs and parts of communications, could also be to blame.”

Again, with Apple only accounting for approximately 20% of Hon Hai’s bottom line, how can Gauna pinpoint with reasonable certainty which company is to blame for manufacturing slowdowns? If anything, given the ongoing success of Apple’s entire product line, wouldn’t Cupertino be the last place to point the finger? That’s not to say that Apple isn’t the cause, there just seems to be a clear lack of evidence indicating such and the leap from a Hon Hai manufacturing slowdown to a decreased demand for Apple products seems tenuous at best.