A band of Apple Inc. (AAPL)'s most bullish fans on Wall Street are growing increasingly bearish over concerns that holiday iPhone sales have been weak and that the company needs new breakthrough products to fend off rivals Google Inc. (GOOG) and Samsung Electronics Co. (005930)
At least five analysts have cut their price targets for Apple since Dec. 16, with some saying Apple's purchases from suppliers indicate iPhone and iPad sales may not meet projections. Because the two products are Apple's largest sources of revenue and profit, any slowdown in demand would bode ill for growth prospects.
The reports from Citigroup Inc. (C), Pacific Crest Securities, Mizuho Securities USA, BMO Capital Markets and Canaccord Genuity mark a reversal from earlier this year, when analysts were racing to issue upbeat predictions, with at least two saying Apple would top $1,000. Instead, the shares have dropped more than 25 percent from a September record amid speculation the iPhone is saturating the market, ratcheting up pressure on Chief Executive Officer Tim Cook to introduce a new hit product.
“Apple is feeling the heat,” said Michael Obuchowski, a portfolio manager at North Shore Asset Management LLC, which owns Apple shares. “There is a lot of pressure on Apple to bring new magical devices to the market, and that hasn't happened in a while.” He said the latest iPhone and iPad mini are incremental improvements on previous devices.
Apple, based in Cupertino, California, rose 1.1 percent to $524.58 at 9:30 a.m. in New York. Even with the decline since September, the shares had gained 28 percent this year through yesterday.
Glen Yeung, an analyst at Citigroup, wrote in a note on Dec. 16 that Apple's Asian suppliers have been reporting cuts in orders, raising questions about the iPhone 5's strength. The bank reduced its rating on Apple's stock to neutral from buy and cut its price target to $575 from $675.
With Apple projected to have won 230 million iPhone users by the end of the year, the company's customer growth will start to ebb because it is approaching a saturation point, said Andy Hargreaves, an analyst at Pacific Crest Securities in Portland, Oregon. He scaled back his prediction for new iPhone customers in 2013 to 62.4 million from 84.3 million.
“Global consumer demand for iPhone 5 is not as strong as we anticipated,” Hargreaves said in a report, in which he cut his target price for the stock to $565 from $645. “Although we believe iPhone 5 remains the best-selling high-end smartphone on the market and is likely gaining significant share right now, a combination of market saturation, weak global demand and incremental innovation that has surpassed consumer demand” are probably hurting iPhone sales, he wrote.
China, a country where many investors have been looking for Apple to generate growth, also is presenting challenges, according to BMO Capital Markets. While Apple said yesterday it sold 2 million of the iPhone 5 in the device's first weekend on sale in China, the company isn't likely to team up with China Mobile (941), that country's largest wireless carrier, until the second half of 2013, BMO technology analysts wrote in a report, also reducing their estimate for iPhone sales to 165.5 million from 171.5 million for fiscal 2013. Samsung, which uses Google's Android software and is Apple's biggest smartphone rival, is advertising heavily in the U.S. as well as in Asia, according to the report.
“There's increased competition,” North Shore's Obuchowski said.
Analysts' estimate cuts in recent days continue a trend started earlier this month. UBS AG cut its price estimate for the stock to $700 from $780 on Dec. 14, citing concern that growth may slow for the iPhone and iPad. Apple component suppliers have been receiving order cuts, according to Peter Misek, an analyst at Jefferies & Co. who cut his projection for the shares to $800 from $900 earlier this month.
Still, many analysts remain optimistic. Brian White of Topeka Capital Markets maintained his prediction that Apple's stock will reach $1,111, citing prospects for iPhone growth in China. Maynard Um of Wells Fargo Securities published a report yesterday titled “The Mayan Apocalypse Is Not Upon Us,” saying concerns about Apple are overblown.
A key moment for determining whether Apple's recent slide is justified will be the company's first-quarter financial report in January, Obuchowski said. The three-month period from October to December will include the first full quarter of sales for the iPhone 5, as well as new iPads, Mac computers and iPods.
“We might very well find out that the fears were overblown, or we will find out that the company's growth is beginning to slow,” he said.
The holiday period is typically Apple's most lucrative -- last year, the company generated 30 percent of total revenue in the fiscal first quarter.
Apple's sales also may be less than some analysts predict because it is selling more lower-priced items, such as the new iPad mini, instead of the newer, high-end models, said Abhey Lamba, an analyst at Mizuho, who cut his stock-price projection to $600 from $750.
To spark new growth, Apple may introduce a lower-end iPhone tailored for emerging markets such as China, said Gene Munster, an analyst at Piper Jaffray Cos., who has said Apple's stock will reach $1,000.
“The $64,000 question is, do they have the next exciting two or three things up their sleeve?” Max Wolff, a research analyst at Greencrest Capital Management, said in an interview with Bloomberg Television. Adding a new product will be necessary to propel long-term growth, he said. A television may not be as groundbreaking because Apple isn't likely to strike new licensing deals with media companies such as Time Warner Inc. (TWX), CBS Corp. (CBS) and Walt Disney Co. (DIS), Wolff said.
“There is definitely a need for the next big thing,” Mizuho's Lamba said in an interview.