Apple iPhone 5 Hampered By Component Shortages - Investor's Business Daily

A shortage of a new display technology used in Apple's (AAPL) iPhone 5 is likely a big reason why the company shipped a lower-than-expected number of handsets in its debut weekend.

The 4-inch in-cell touch-screen display also is the most expensive component of Apple's new smartphone, according to a tear-down estimate Tuesday by IHS iSuppli. It's estimated to cost $44 each, up from $37 for the 3.5-inch display used in last year's model, the iPhone 4S.

Japan Display, LG Display (LPL) and Sharp are making the displays for Apple, but they have experienced production problems, analysts say. The new displays pack the touch sensors and liquid crystals into the same layer, allowing for thinner LCD screens and a thinner phone. At 7.6 millimeters thick, the iPhone 5 is 18% thinner than its predecessor.

Apple's iPhone 5, unveiled by exec Phil Schiller, includes a display that's in short supply, crimping sales. View Enlarged Image

Predictions 'Unrealistic'

Apple announced Monday that it had sold more than 5 million iPhone 5 handsets in the first three days of availability. Many analysts expected more, with estimates as high as 10 million units. Those predictions were "unrealistic," said Sterne Agee analyst Shaw Wu, who forecast 4 million to 5 million units in the first weekend.

"Every time there's a new technology there's a bit of a learning curve before you can ramp production," Wu said. "There's a bunch of new components here."

Besides the in-cell touch-screen, there's a new baseband chip for 4G LTE wireless from Qualcomm (QCOM) and a new case for the device, Wu said. "It's a combination of these new components that's causing the supply constraints."

At $34, the Qualcomm wireless chip is the second most expensive component in the iPhone 5, IHS says. The previous Qualcomm chipset cost $23.50.

Still, 5 million iPhone 5 units sold in three days is a big number, Wu says. "In the big picture, it doesn't really matter how many they sell in a few days," Wu said. "It matters what they sell over the next two quarters." The iPhone 5 could have a product life cycle of 12 to 18 months, he says.

But Apple investors couldn't contain their disappointment. Shares fell 2.5% to 673.54 on Tuesday, after falling 1.3% on Monday.

IHS broke apart an iPhone 5 to determine its manufacturing cost and the suppliers. The lowest-priced model, one with 16 gigabytes of flash memory, costs $207 to build and sells for $649 without a wireless contract, IHS says. That implies a profit margin of 68%. Higher priced models, those with more data storage capacity, carry higher margins of up to 72%. Profit margins for the previous model, the iPhone 4S, were estimated at 70% and 71%, depending on the amount of flash storage, IHS says.