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Apple: An iPhone Mini Could Make The Stock Sweet

 January 24, 2013 01:25 PM

(By Mani) Apple, Inc. (NASDAQ: AAPL) shares tanked more than 10 percent after its iPhone shipments missed estimate and second-quarter revenue guidance fell below market expectations, reflecting deteriorating investor confidence.

The quarterly results of Apple showed that even sales of 47.8 million iPhone units can't prevent the company's revenue missing the Street's view. Revenue grew 17.7 percent to $54.51 billion, but missed the consensus estimate of a 18.1 percent growth to $54.73 billion and 50 million iPhone units.

In addition, the gross margin decline to 38.6 percent from 44.7 percent was another shock for investors as Apple have consistently reporting margins around 40 percent, indicating the ongoing competitive pressure with Samsung and other Android vendors.

[Related -Sobering Quarter and Guidance for Long-Time Apple Bull]

Finally, the last nail in the coffin was its second quarter revenue outlook of $41 billion to $43 billion, which came in below analysts expectation of $45.63 billion. The company expects gross margin of 37.5 percent to 38.5 percent, operating expenses of $3.8 billion to $3.9 billion, and tax rate of 26 percent for the second quarter.

All these factors triggered a panic among investors who pressed the sell button and several Wall Street analysts have even slashed their price targets heavily. Notably, Deutsche Bank's Chris Whitmore chopped the target to $575 from $800; Oppenheimer analyst Ittai Kidron cut the price target to $600 from $800; RBC Capital's Amit Daryanani trimmed it to $600 from $725.

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So, what does all this mean? It is simple that Apple has lost its clear product leadership, mainly to Samsung.

"We think Apple's products, when considering the entire product line-up and user experience, are better than those of competitors, but the distance between Apple and competitors has shrunk considerably," BMO Capital Markets analyst Keith Bachman wrote in a note to clients.

Moreover, when assessing the importance of screen size for phones, Apple blew it as there is a large group of users who favor larger screen size such as the Samsung Galaxy. There is substantial growth for Apple in emerging markets/pre-paid with a lower cost iPhone and larger form factor smartphones (about 5'' screens) which it doesn't address but is resonating with competitive offerings.

So, it is high time for Apple to broaden its portfolio in iPhones and reach in phones in the coming quarters. The strategy worked with iPad mini.

"We think the iPad mini illustrates the point of better units and revenues within the iPad family, but at the cost of margins. Hence, we think investors will need to be prepared for more margin issues in future quarters, though we would also expect a positive impact to units, revenues, and EPS," Bachman noted.

There is substantial appetite for a lower priced iPhone, and Apple would be well served to address the market with a ‘good / better / best' segmentation strategy.

The latest revenue forecast implies a significant deceleration in iPhone unit growth which will likely fuel investor market share concerns in the near- term. Stock views that an iPhone segmentation strategy would serve Apple well and improve investor confidence in its future.

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