Apple shares fall after muted iPhone sales

Tue Jan 28, 2014 1:46pm EST

A clerk arranges Apple's iPhone 5C phones on racks bearing the logo of China Mobile, at a mobile phone shop in Beijing December 23, 2013. REUTERS/Kim Kyung-Hoon

A clerk arranges Apple's iPhone 5C phones on racks bearing the logo of China Mobile, at a mobile phone shop in Beijing December 23, 2013.

Credit: Reuters/Kim Kyung-Hoon

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(Reuters) - Apple Inc needs a cheaper iPhone to keep pace with low-cost rivals, analysts said, after the company's smartphone sales fell short of lofty expectations in the holiday shopping season.

Apple's shares fell as much as 8.8 percent on Tuesday, their steepest decline in a year, a day after the company's weak revenue forecast for the current quarter renewed fears about Chinese smartphone demand and a tepid global market.

The world's most valuable technology company had lost $43 billion of its market capitalization - more than the entire market value of Twitter Inc - at the stock's intra-day low of $502.07.

Activist investor Carl Icahn, who is waging a public campaign to get Apple to return more cash to shareholders, bought up $500 million worth of Apple stock - his third purchase of the same size in less than a week - to boost his total investment in the iPhone maker to more than $4 billion.

At least 14 brokerages lowered their price targets on Apple, reflecting concerns that it was becoming harder to sell high-end phones as markets get saturated.

The record 51 million iPhones sold by Apple in the quarter ended December 28 fell short of the 55 million expected by Wall Street.

Analysts on Tuesday attributed some of this shortfall to the pricing of the iPhone 5C. Apple's low-cost alternative to its iPhone 5S was unable to grab market share from cheaper rivals using Google Inc's Android software, they said.

"We don't think Apple has created a meaningful new product category with the iPhone 5C," BMO Capital Markets analyst Keith Bachman wrote in a report.

He said Apple should create a "more impactful medium-price iPhone", with a lower price tag than the iPhone 5C launched in September.

The iPhone 5C sells for $549 without a two-year contract with a telecom carrier. Samsung Electronics Co Ltd's flagship Galaxy S4 now sells for $530 without a contract in the United States, while Google Nexus 5 sells for $350.

Analysts said they were looking to the launch of the iPhone 6, a mid-range smartphone, and wearable devices such as iWatch in the second half of the year to boost investor confidence.

"Apple has the ability to lower the price of the iPhone to compete more aggressively in the midrange, and we believe the resulting elasticity would yield net profit improvements," Goldman Sachs analysts said.

Apple maintained its gross profit margin of 37.9 percent for the quarter just ended, as more people opted for the high-margin iPhone 5S than the 5C.

But rival Samsung, which has a phone for every budget, widened its lead over Apple by cornering 29.6 percent of the global smartphone market in the fourth quarter of 2013, ahead of Apple's 17.6 percent, data from research firm Strategy Analytics showed.

"The high-end smartphone market is simply looking saturated," Evercore analyst Rob Cihra wrote in a note. "Although adding a cut-rate low-end doesn't suit Apple's (business) model, not having one limits growth."

IPHONE SALES DISAPPOINT

Citigroup analyst Glen Yeung said the iPhone sales miss comes despite expectations of higher sales from China, where it signed a deal with China Mobile Ltd, and the addition of NTT DoCoMo as a carrier in Japan.

Analysts said slowing growth in iPhone sales was not just due to company-specific reasons, noting that Samsung's Galaxy phones have also been facing a decline in demand.

"There were a lot of reasons to believe iPhone sales would grow double-digit in units in 2014 even as the market matured, but 1Q results and the March guide pretty much put that thesis to rest," Raymond James analyst Tavis McCourt wrote in a note.

McCourt downgraded the stock to "outperform" from "strong buy" and cut his price target to $550 from $700.

Apple forecast sales of $42-$44 billion this quarter - brisker than usual because of its deal to sell iPhones through China Mobile, the country's No.1 carrier. Wall Street analysts on average had expected $46 billion.

"We had assumed the China Mobile partnership would mute March quarter seasonality, but this was overly optimistic," Goldman Sachs analysts said in the note.

Several analysts, however, said the China Mobile deal would begin to pay off as the company extends the partnership to 340 Chinese cities by the end of the year, from only 16 currently.

(Reporting by Supantha Mukherjee in Bangalore; Editing by Saumyadeb Chakrabarty)

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Comments (18)
mgear2 wrote:
“At least 14 brokerages lowered their price targets on Apple, reflecting concerns that it was becoming harder to sell high-end phones as markets get saturated.”
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Here’s a crazy idea, Apple: Don’t price iPhones $100-$200 more than other devices with similar — or better — technology. I mean, really… You could get an S4 or HTC One for free on contract for much of the holidays, or $50 if your timing was off. Most of the best iPhone 5S sales left a 32GB model north of $200.

Oh, and as for the iPhone 5C, how about a color or two that appeals to the large swath of the population that isn’t really into soft pastels?

These things would probably be self-evident to a company less full of itself.

Jan 28, 2014 10:47am EST  --  Report as abuse
Kiljoy616 wrote:
Apple is not Walmart, they don’t need a cheaper phone, actually their cheaper phone has taken some of the luster out of a company know for innovation and coolness.

They need to put more emphasis on bringing more products out that people want to buy. Apple is not here for some wall street scam artist and never should.

Apple is here for the consumer who wants things that work and hold up to time.

Jan 28, 2014 10:52am EST  --  Report as abuse
ort wrote:
A person just glancing at headlines would read something like this and assume that Apple had a bad quarter and that iPhone sales are down — but in reality, they sold more iPhones last quarter than they have sold in any other quarter and had the 4th most profitable quarter ever. And by ever, I mean all companies for all time. Apple just posted the 4th most profitable quarter in the history of the world… and yet the headlines all read like something bad happened.

It’s lazy shoddy journalism… and while I’m not one for conspiracy theories, this sort of thing happens enough on Reuters to make me wonder if they don’t have some ulterior motive.

Jan 28, 2014 11:28am EST  --  Report as abuse
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