Tags: apple | iphones | fail | dazzle

Apple's Shares Tank as New iPhones Fail to Dazzle

Wednesday, 11 Sep 2013 04:42 PM

 

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Apple Inc's shares slid 6 percent on Wednesday as a pricier-than-expected iPhone "5C" extinguished hopes of a major expansion into lower-end markets such as China, while a fingerprint scanner-equipped premium version fell short on hardware advancements.

The 5C and costlier 5S, introduced to much fanfare on Tuesday, won fans among some Wall Street analysts, who said preserving a premium price can safeguard Apple's already declining margins.

Others said the world's most valuable technology company, under siege in Asia and other emerging markets from Samsung Electronics and China's Huawei, was missing an opportunity to reverse slipping market share and drive significant sales growth.

The 5C's price appeared too lofty to fend off rivals in emerging markets. It will sell for 4,488 yuan ($730) in China, more than the average monthly urban income for the country and about $200 more than its price in the United States.

Apple's shares slid 5.6 percent to a one-month low of $467.24 at midday after at least three brokerages downgraded the stock a notch, though four others raised their target prices. Nomura Equity Research increased its target to $480 from $420.

If the drop in Apple's share price holds, the fall would be biggest single-day slide since Jan 24.

Still, Apple's shares climbed 28 percent between the start of July and Monday, before the Apple launch, as anticipation began building about the company's next iPhone.

The iPhone 5S also disappointed investors accustomed to great things from a product that accounts for half or more of Apple's profit.

"Investors were put off that Apple's price point didn't go low enough to attract a new market. It doesn't have the same range in price that Apple's competitors have," said Mark Luschini, chief investment strategist at Janney Montgomery Scott in Philadelphia, which manages about $58 billion in assets.

"Also, there was nothing transformational announced. It has the fingerprint scan and new colors, but bigger features, like different screen sizes, don't seem to be at the ready. This was less than expected from a company that has a reputation for surprising with a killer product or strategy."

Credit Suisse analyst Kulbinder Garcha estimated that Apple's share of the smartphone market would fall to 15.5 percent this year and 13.1 next year, from 18.1 percent in 2012.

"Rather than offer attractive pricing for consumers, and move the iPhone 5C into a new and growing price segment, Apple retained a premium pricing strategy in targeting the $400-800 smartphone segment," Garcha said in a note.

"This segment is not forecast to see meaningful growth long term. This decision, at the margin, is good for profitability but not growth," Garcha said.

Apple's profit for the quarter ended June 29 fell 22 percent as gross margins fell below 37 percent from more than 42 percent in the year-earlier quarter.

Nomura analyst Stuart Jeffrey said Apple may have ensured stable margins for the next couple of quarters by pricing the 5C at $99 with a contract and $549 without. This was not enough for BofA Merrill Lynch, Credit Suisse or UBS, all of which downgraded Apple's stock to "neutral."

Saying the 5C was "nobody's low-margin phone," Cowen and Co analyst Timothy Arcuri said Apple's new relationship with Japan's NTT DoCoMo Inc plus an expected tie-up with China Mobile Ltd supported the view that Wall Street's estimates for Apple earnings in 2014 looked too low.

Arcuri said gross margins for the 5C appeared to be as high as in the mid-50 percent area.

Raymond James and Associates maintained its "strong buy" recommendation on the stock and raised its share price target to $675 from $600, based on expected demand for the lower-end iPhone, coupled with the NTT DoCoMo relationship and the preservation of gross margins.

Canaccord Genuity kept its "buy" rating on the stock and raised its target price to $550 from $530, citing Apple's aggressive launch plans in more than 100 countries by year-end.

The brokerage also raised its 2014 estimate for iPhone sales to 180 million units from 177 million.

Analysts at UBS Securities said that even if Apple secures a partnership deal with China Mobile in the near term, it will have a hard time competing against Google Inc Android devices made by Samsung and others, priced 40 percent to 50 percent lower than the iPhone 5C.

UBS, which cut its rating on Apple's stock to "neutral" from "buy," cited a survey of 35,000 Chinese consumers conducted by ChinaDaily.com that indicated only 2.6 percent of respondents would consider buying the cheaper iPhone at the $549 price.

"We worry that Apple's inability/unwillingness to come out with a low-priced offering for emerging markets nearly ensures that the company will continue to be an overall share loser in the smartphone market until it chooses to address the low end," Sanford C. Bernstein analysts said in a note.

© 2014 Thomson/Reuters. All rights reserved.

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