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iPhone Causes Apple Plunge: What Wall Street Is Thinking (Update 1)

UBS analyst Steve Milunovich (Buy, $625 PT)

"CEO Tim Cook did say that a new product category would be introduced this year. Spending supports more offerings-R&D almost doubled the last two years and F2Q expenses should be unseasonably strong at flat sequentially. Investors are getting antsy. Apple mentioned iBeacon and potential in payments; wearables are expected though timing is uncertainty. Cook said Apple has plenty of disruptive ideas but needs to concentrate resources on the best opportunities. This approach has worked historically and fits with our belief in focus-we are willing to give Apple the benefit of the doubt."

Credit Suisse analyst Kulbinder Garcha (Neutral, $500 PT)

"iPhone volume came in light of expectations at 51.0mn units (+6.8% y/y and +51.0% q/q), which is particularly concerning given that Apple launched the iPhone 5s/5c in several markets early (including China) and added NTT DoCoMo as partner. Additionally iPhone volume was weak in North America with revenue in the overall region declining 1% y/y. Going forward, we believe iPhone volumes will be 150.3mn/147.3mn in FY14/FY15 with only modest growth for several factors: 1) Apple remains solely in the high-end of the smartphone market (>$400 ASP), which we believe is mature and no longer growing; 2) while China Mobile will become sizeable over time, it may have a limited impact near term given network quality and initial pricing; and 3) by ignoring the mid-tier smartphone segment, iOS will continue to cede incremental share to Android as we estimate overall market share fading to 15.0%/12.8% in CY13/14 vs. 18.1% in CY12."

BMO Capital Markets analyst Keith Bachman (Outperform, $560 PT)

"iPhone units of 51 million in the December quarter were low compared with our estimate of 55 million, though iPhone ASPs increased almost 12% q/q. Management is guiding revenue to $42-$44 billion for the March quarter vs. our $44.6 billion estimate and consensus of $46.0 billion. We are not encouraged by management's comments that channel fill, along with FX and higher revenue deferrals in the December quarter are negatively impacting March q/q revenue growth, since this implies that the December quarter was not as good as it looked. If we eliminate $2 billion of revenue from the December quarter, then this would suggest the company is guiding revenue to decline by 22% q/q in the March quarter vs. 20% last March quarter."

JPMorgan analyst Mark Moskowitz (Overweight)

"We expect shares of Overweight-rated Apple to be under pressure in the near term. iPhone units were light, and the guidance for the Mar-Q implies continued softness, alongside higher OpEx. We think the iPhone air pockets reflect broader slowing in the smartphone market and company-specific factors."

Morgan Stanley analyst Katy Huberty (Overweight, $630 PT)

"If CEO Tim Cook's acknowledgement of a new product category launch in 2014 isn't evidence enough, a meaningful step up in R&D expense (similar to 2000 pre-iPod, 2006
pre-iPhone, and 2008 pre-iPad), and the clear discontinuation of the iPod line (to make room for new categories, in our view) provides confirmation. So, while we'd rather see a business that is accelerating (vs. the flat iOS growth we highlight above), transparency into meaningful product launches should help reaccelerate growth in C2H14 and put in a valuation floor in the $500 range (assumes Apple's current 12x P/E on consensus CY14 EPS estimates that are likely to land in the $41-42 range)."

-- Written by Chris Ciaccia in New York

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