This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Here's the Real Reason Investors Should Be Worried About Apple's iPhone 5

Updated to include UBS analyst comments

NEW YORK ( TheStreet) -- In the daily speculation on everything Apple (AAPL - Get Report), investors may be missing what could be the biggest story to emerge about the iPhone 5 after its September release.

Apple's newest iPhone and a lineup of tablet computers will provide a fourth-quarter test to the sustainability of profit margins for telecom giants Verizon (VZ - Get Report), AT&T (T - Get Report) and Sprint (S).

A recent Wall Street Journal report indicates that Apple may be cutting orders with suppliers who build the iPhone 5, potentially indicating less-than-anticipated demand for the company's newest smarthphone. The report, which cites anonymous sources, adds to a frenetic 2013 in the Apple rumor mill.

Previous media reports indicated Apple might start selling iPhones as low as $99 by year-end. However, Phil Schiller, Apple's head of marketing, quickly nixed such speculation.

Apple, at its 11 price-to-trailing-earnings multiple, seems to attract an ever-growing number of bulls who see America's most profitable company as an obvious 2013 value -- and skeptics who call the company a value trap and foresee a commoditization of its premium-priced tech products.

In the interim, the more urgent iPhone 5 story may have little to do with Apple or its shares.

As telecom giants Verizon and AT&T prepare to report fourth-quarter earnings, analysts are bracing for the full impact of smartphone subsidies and, in particular, the earnings hit that might come from an entire quarter worth of subsidized iPhone 5 smartphone sales.

Carriers already have indicated that Apple's newest smartphone will have an impact on earnings, even if trends like underlying subscriber and average-revenue-per-user growth indicate a strong outlook for the industry's top players.

Earlier in January, Verizon CEO Lowell McAdam said the company added 2.1 million wireless subscribers in the fourth quarter, "a truly impressive result," according to Craig Moffett of Bernstein Research. Still, the oftent bearish telecom analyst noted such subscriber growth may come at a cost, highlighting two January 8-K filings Verizon made with the Securities and Exchange Commission that indicate wireless service margins for the fourth quarter might fall on a year-over-year basis.

A decline in wireless margins as a result of subsidized new iPhone and Google (GOOG) Android-operated handsets would cut against three successive quarters where Verizon's margins have improved, according to a Monday note by Moffett. It means investors in Verizon and AT&T might have to temper expectations about sustainable wireless profitability.

On Monday, UBS analyst John Hodulik downgraded Verizon from 'Buy' to 'Neutral' on expectations of lower than expected wireless and wireline profitability and a lack of "positive catalysts." Still, in spite of fourth quarter earnings concerns, Hodulik noted a strong long-term outlook for the carrier.

"We continue to believe Verizon to be the leading wireless company in the U.S. given its network position, continued strong share gains, high single-digit service revenue growth and the highest margins in the industry," wrote Hodulik.

A scenario of fourth-quarter telecom carrier earnings weakness could either vindicate long-time skeptics of wireless profitability. A moderate earnings hit might give telecom investors little reason to believe the industry's economics aren't on a long-term uptrend headed into 2013.

Verizon reports earnings on Jan. 22, with analysts expecting 48 cents a share in profit on $32.1 billion in revenue, according to analyst estimates compiled by Bloomberg. AT&T reports on Jan. 24 with analysts expecting an adjusted profit of 55 cents a share in $29.7 billion in revenue, the Bloomberg data show.
1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
PCS $11.84 0.00%
AAPL $93.74 0.00%
S $3.43 0.00%
T $38.82 0.00%
VZ $50.94 0.00%


Chart of I:DJI
DOW 17,773.64 -57.12 -0.32%
S&P 500 2,065.30 -10.51 -0.51%
NASDAQ 4,775.3580 -29.9330 -0.62%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs