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

Updated from 8:13 a.m. EST to include comments from Morgan Stanley.

NEW YORK (TheStreet) -- Apple (AAPL) shares dropped sharply in trading on Tuesday, following fiscal first-quarter results that missed some Wall Street estimates, and over concerns about revenue guidance for the upcoming quarter.

Apple reported fiscal first-quarter earnings of $14.50 a share on $57.5 billion in revenue, up 6% from a year earlier. Analysts surveyed by Thomson Reuters expected Apple to earn $14.07 a share on $57.45 billion in revenue. Gross margin was 37.9% during the quarter.

The company sold 51 million iPhones, compared to 47.8 million in the year-earlier quarter. Apple was supply-constrained on the iPhone 5s during the quarter, with CEO Timothy D. Cook noting the demand mix was much different than the company originally thought.

"And so the mix was stronger to the 5s, and it took us some amount of time in order to build the mix that customers were demanding," Cook said during an earnings conference call. "And as a result, we lost some sort of units for part of the quarter in North America and relative to the world, it took us the bulk of the quarter, almost all the quarter, to get the iPhone 5s into proper supply."

Apple shares were falling 7.5% to $509.06.

AAPL ChartAAPL data by YCharts


Apple said it sold 26 million iPads and 4.8 million Macs during the quarter.

For the fiscal second quarter, Apple said it expects revenue of between $42 billion and $44 billion, with margins between 37% and 38%, and operating expenses between $4.3 billion and $4.4 billion, with a 26.2% tax rate.

Following the report, analysts were concerned about the iPhone mix and whether the market was reaching maturation. There was also some optimism surrounding Apple's potential entry into the mobile payments market, though the negative sentiment outweighed that. Here's what a few analysts on Wall Street had to say about Apple's earnings report:

Oppenheimer analyst Ittai Kidron (Perform, No PT)

"We're downgrading Apple to Perform and removing our $560 PT. Apple delivered a solid Dec. qtr., but provided guidance showing new products already in supply/demand balance in most regions. We see Apple now entering a lull period (like the one seen in 1H-CY13) until its next new product cycle comes into view. Near-term expansion opportunities (current products) are mostly in emerging markets, but with competition tough (especially in China) and margins/ASPs at risk of moderation, we believe investors would be cautious. A larger screen iPhone and phablets are likely 2014 additions, but we see this as replacement focused with pressure mounting to deliver in a new product category where timing is uncertain. Overall, we see AAPL as range-bound through the summer."

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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