Apple's Core: The iPhone (Update 1)

Updated from 9:37 a.m. EST to provide investors comments regarding stock price in the seventeenth paragraph.

NEW YORK (TheStreet) -- Apple ( AAPL) reports second-quarter earnings after the bell Tuesday and investors will be paying particularly attention to iPhone sales, given recent worries of a slowdown.

The importance of the iPhone is vast, as it accounted for 52.66% of Apple's revenue in its most recent quarter.

Concerns about iPhone sales strengthened last week, when Apple supplier Qualcomm ( QCOM) said it's seeing supply constraints for its 28 nanometer (NM) chips during its second-quarter earnings call. The San Diego-based chipmaker said it's working on getting supply up to speed, but that's led some to believe Apple may not sell as many iPhones as it could.

Canaccord Genuity analyst T. Michael Walkley lowered his near-term iPhone estimates, as iPhone 4S sales slow down in developed markets. He did raise fiscal 2012 iPhone estimates based on expected strong demand for the iPhone 5.

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"Our recent channel checks indicated iPhone sell-through share has modestly declined in certain developed markets, and we expect this could continue as Android competitors ramp new smartphones during the June and September quarters and consumers start to hold off iPhone purchases in anticipation of the iPhone 5," Walkley wrote in his research note. He lowered his 2012 earnings estimates but raised his 2013 earnings.

Walkley rated Apple shares buy and raised his price target to $740 from $710.

Apple sold 37.04 million iPhones, 15.43 million iPads, 5.2 million Macs, and 15.4 million iPods during its all important first-quarter, which Bill Kreher, technology analyst for Edward Jones, described as "mind-boggling."

There are also concerns that telecom giants AT&T ( T) and Verizon ( VZ) may cut subsidies for the iPhone, as it's proven to weigh on their margins, leaving the potential for Apple to sell fewer phones. Verizon said it activated 3.2 million iPhones during the last quarter, down from 4.2 million the previous quarter.

AT&T also posed worries Tuesday when it announced that it activated 4.3 million iPhones during its first-quarter, below Wall Street expectations.

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Piper Jaffray's Gene Munster said he believes the fears of a subsidy cut are overblown, in light of Verizon's comments on its earnings call. Munster noted Verizon management said it manages subsidies by handset, and that "Verizon appears to be looking to potentially control subsidies through greater handset provider competition."

Channing Smith, portfolio manager at Capital Advisors Growth Fund believes Apple's earnings will be good, but warrants some caution in light of lofty expectations.

Expectations have been rising and the stock price has been falling over the last week which is troubling. Near-term momentum has been weak with the stock trading well below its 10-day and 30-day moving average and is close to breaching the 50-day average. If earnings disappoint you could see this selloff be more pronounced as the technical support "breaks down further," Smith said in an email. He is long Apple shares.

Raymond James analyst Tavis McCourt believes these fears are overblown, and Apple may have shipped more iPhones than his 33 million unit estimate.

"Assuming iPhone shipments are down the same as what Qualcomm guided its overall chip shipments by, that would be roughly 32 million iPhone shipments in June, ahead of our 31 million estimate," McCourt noted in his research report.

McCourt believes there is early evidence of pent-up demand for Apple's next offering, but he sees no reason to get "too concerned at this point based on the Qualcomm and Verizon data points." McCourt rated Apple shares strong buy with a $800 price target.

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Investors must also take into account that the majority of iPhone sales are international now, with the U.S. being just 30% of total iPhone sales, according to Piper Jaffray's Munster. "We remain comfortable in our 33m unit estimate based on faster International growth fueled by the January launch of iPhone 4S in China," Munster wrote in his research note. He rated Apple shares overweight with a $910 price target.

Joshua Brown, vice president at asset management firm Fusion Analytics believes Apple is poised to move higher once it reports earnings. "We think the stock probably rallies on earnings but does not take out new highs until we get closer to iPhone 5 in October, I suppose," Brown said in an email.

Analysts polled by Thomson Reuters expect Apple to report earnings of $10.02 a share on revenue of $36.689 billion. Independent analysts compiled by Estimize, the social-networking financial estimates platform, expect Apple to report $11.40 a share in earnings on $38.62 billion in revenue.

Shares of Apple closed at $571.70 on Monday.

Interested in more on Apple? See TheStreet Ratings' report card for this stock.

-- Written by Chris Ciaccia in New York

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