Apple Inc's biggest success has become its biggest
risk factor. The iPhone revolutionized the Smartphone industry, driving Apple's
expansion into Europe and China and, after just half a decade, yields about
half its annual $100 billion revenue haul. But the world's most valuable
technology company -- which throughout the global recession near-unfailingly
smashed Wall Street forecasts -- is beginning to lose its aura of
invincibility.
The company has missed
Wall Street targets twice in under a year. CEO Tim Cook may now have to worry
more about economic and product launch cycles, and the whims of fickle
consumers. Tuesday's numbers also showed the impact of the economic slowdown in
Europe on its sales, something a smaller, less-exposed Apple was able to dodge
a few years ago.
"Apple is a little
bit more vulnerable," said Giri Cherukuri, head trader at OakBrook Investments.
"There are chinks in their armor now."
The reason for its
vulnerability: its very success and size. "When they were small enough,
they could power through it," Sterne Agee analyst Shaw Wu said. "Now
it's so pervasive that it's a lot harder."
The change in sentiment
was evident in Cook's call with investors on Tuesday following a miss in fiscal
third quarter earnings numbers.
Cook assessed how the
global economy -- particularly in Italy, France, Greece, and China -- impacted
iPhone sales. This stood in stark contrast to his comments in 2009, when the
world's credit system froze and global economy was grinding to a halt in the
aftermath of Lehman Bros' collapse.
"We just spend our
time projecting our business and leave the economy forecasting and comments to
economists," Cook said during an earnings conference call nearly three
years ago -- before the launch of the iPad and when the Mac computer generated
more revenue than the iPhone. On Tuesday, Cook was somewhat more expansive in
his assessment of the business environment.
"We are certainly
seeing a slowdown in business in that area," Cook said of Western Europe.
"Fortunately, the U.S. and China, although I realize it's getting a lot of
press, we're not seeing anything there that we would classify as an obvious
economic issue."
BRANDING SHEEN
The blockbuster
smartphone that adds a special gloss to the Apple brand is a highly cyclical
product. Buyers emerge in droves every time a new version is launched, lining
up at stores overnight, and snarling supply for the device. Its popularity has
heightened speculation around the device every year as over 100 million yearly
customers decide when to switch to a new model, whether to buy now or hold out
for a better but same-priced phone.
The now-more predictable
line-up also means consumers are more attuned to product life cycles and launch
timelines, something that Apple goes to great lengths to keep secret. In fiscal
2009, Apple grew 35 percent despite a global credit crisis that hurt most
companies. But Apple generated only $6.75 billion from iPhones that year. It
raked in over $16 billion in iPhone sales last quarter alone, a little under
half of total revenue.
"When you become so
reliant on a single device then that device's life cycle is going to have a
much bigger impact on the results," Morningstar analyst Michael Holt said.
Sales of the iPhone slipped 26 percent sequentially last quarter, reducing
margins by 460 basis points to 42.8 percent.
Investors had already
lowered their expectations, but they did not expect the company to miss
altogether. A lot of the blame was placed on the pause prior to the launch of a
new iPhone, which some fear is becoming a yearly trend. "We expect to see
greater volatility in Apple's quarterly results going forward due to the
growing importance of the product cycle," Holt said, adding that more
consumers now are tuning into the chatter around expected new products.
That's prompted Wall
Street to take Apple's notoriously conservative earnings forecast more seriously
now. On Wednesday, JPMorgan cut its price target on the stock to $675 from
$695, Raymond James slashed it to $730 from $800, and Canaccord Genuity reduced
its target slightly to $797. Goldman cut its price target to $790 from $850.
Finally, as consumers await the new iPhone -- expected to be a complete
redesign with a bigger screen -- competition is growing from the likes of
Samsung Electronics' new Galaxy S III.
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But analysts and
investors say that the choppiness in iPhone sales doesn't matter as long as
Apple's strong growth resumes during the holiday quarter after the anticipated
new iPhone hits the stores. Expectations are high that Apple will launch a
phone that will again beat the competition in terms of features. And the
bullish view of Apple's growth is evident in the stock price, which is up 42
percent for the year despite a 4.3 percent drop on Wednesday on the Nasdaq
market.
"This is likely one
of the last buying opportunities ahead of the iPhone 5 launch as we expect
headwinds to reverse in the calendar fourth quarter," Morgan Stanley's
Katy Huberty said.
Reuters
Its iPhone business
alone now brings in more money than Microsoft and the iPad has become a
multi-billion dollar product for Apple. Apple is on pace to be the world's
largest technology company in terms of sales by the end of the year, and it is
among the most profitable companies in the world, CNNMoney said.
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