RPT-UPDATE 1-Apple set to report record holiday, but China doubts stay

Sun Jan 26, 2014 10:00pm EST

By Bill Rigby

Jan 24 (Reuters) - Apple Inc may notch its most successful holiday shopping season yet when it reports quarterly results on Monday, setting records for sales of its gift-friendly iPhones and iPads.

It will, however, continue to draw investor scrutiny over sales in ultra-competitive China, its No. 2 market but a drag on revenue and margins in recent quarters. The iPhone maker has been ceding ground to Samsung Electronics and other rivals there, but has now sealed a long-awaited deal to sell iPhones through China Mobile that could bear fruit in 2014.

Apple, which once routinely blew away Wall Street's most bullish expectations, needs a superb quarter to galvanize the stock. Its shares are down about 3 percent this year.

Activist investor Carl Icahn, arguing that at 13 times forward earnings the stock is undervalued, is building up his stake and demanding the Cupertino, California, company share more of its $146 billion cash hoard.

Longer term, investors want to see what new gadgets Apple can pull out of its hat, a central issue about which Chief Executive Tim Cook has been cagey. Speculation revolves around a smartwatch, a larger-screened iPhone - a nod to Samsung's hugely successful "phablets" - and persistent talk of a TV product.

"Beyond fiscal 2014, it is not a slam dunk that Apple's net income will be higher in three to five years," said Bernstein Research's Toni Sacconaghi. "Without new product categories, we see Apple's end markets as increasingly mature and competitive, which could pressure or limit revenue growth and gross margins."

Samsung, reflecting how intensifying global competition is eroding smartphone profits and margins after years of explosive growth, on Friday reported its first quarterly profit decline in two years.

Sales-wise, Apple's current line-up is still expected to enjoy a strong following despite stiff competition from Samsung and Amazon.com Inc's Kindle Fire.

Wall Street analysts are expecting Apple to report sales of around 55 million iPhones and 26 million iPads, up from 48 million and 23 million respectively in the year-ago quarter.

Of that iPhone estimate, analysts expect good sales of the 5S due to pent up demand and limited supply around launch time, but remain less sanguine about a 5C that has so far failed to excite the cost-conscious consumers it targets.

A CHINA QUESTION

In the options market, traders were bracing for a move of about 5 percent to 6 percent in Apple's shares after its announcement. The sentiment was more bullish than bearish with call volume outpacing put contracts: of 1.87 million contracts of open interest in options, 1.17 million were calls and 706,000 puts.

Apple's stock is up 21.7 percent over the past 12 months, just ahead of a 20.4 percent rise in the Standard & Poor's 500. Still, that has disappointed some investors after the shares increased five-fold in the last five years.

In a lengthy letter to shareholders on Thursday, Icahn urged shareholders to approve his proposal for a new $50 billion share buyback, arguing the company did not need so much cash on hand and that the stock was undervalued relative to the S&P 500.

Apple, which launched a massive share buyback last year, has urged shareholders to reject Icahn's proposal, arguing that it needs sufficient reserves to tackle increasing competition in a fast-evolving mobile industry.

More fundamentally, investors worry about Apple's performance in China, the world's largest cellular market. Analysts say the high-end iPhone is struggling to make headway against cheaper local offerings from Huawei and Xiaomi, while Samsung continues to dominate the market.

Apple has been under siege from a growing coterie of Asian phonemakers over the past year. It ended the third quarter as the No. 2 player with 12.1 percent of the global smartphone market, but down from 14.3 percent a year ago and less than half of Samsung's 32.1 percent currently. Lenovo, LG Electronics and Huawei all made gains, each holding about a 5 percent market share at present, according to Gartner data.

The picture is drastically different in China, where Samsung commanded a 21 percent share in the third quarter of 2013, with Apple trailing in fifth place with 6 percent, according to research firm Canalys.

But some analysts say the addition of China Mobile's vast nationwide network to the iPhone's stable could drive sales of four to five million iPhones in the March quarter.

"Inventory build and magnitude of China Mobile iPhone sales are a big X-factor for the March quarter," Sacconaghi wrote on Friday.

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Comments (1)
LaughingBoy48 wrote:
What makes these analysts so darn ignorant? Tim Cook has already said that Apple has made some great gains in China and additional iPhones will definitely be sold on China Mobile. Wall Street’s pessimism about anything Apple does is intolerable. These freaking idiot analysts were constantly whining about how long it took for Apple to make the China Mobile deal, so why all this sudden doubt about iPhone sales. If it was any other company these wankers would have a positive outlook, but not with Apple. I guess these idiot analysts figure the whole China Mobile deal is now just a waste of time and effort and that CEO Xi just signed the deal to get absolutely nothing out of it. This ridiculous notion that Chinese consumers only the desire the cheapest smartphones available seems like nonsense until it is actually proven. Analysts should take a neutral stance about Apple’s chances in China until proven otherwise.

If investors only want to buy stocks like Facebook, Netflix, Twitter and LinkedIn that’s up to them. In one quarter, Apple makes more in profits than all those companies combined for the whole year. Those companies barely make any profits at all and there’s no guarantee they ever will. Wall Street is nothing but a casino and it has nothing to do with actual value of companies.

Jan 27, 2014 12:09am EST  --  Report as abuse
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