NEWS ANALYSIS: Apple’s costs rise and smartphone growth slows
APPLE CEO Tim Cook is feeling the heat. Eighteen months after taking over from Steve Jobs, Mr Cook is facing rising production costs, competition from Samsung Electronics and slowing growth in smartphones, threatening profits for the world’s most valuable company.
An earnings report on Wednesday may show that fiscal first-quarter net income slipped 2% to $12.8bn, according to analysts’ estimates. In all except one quarter since 2003, profit has jumped more than 10%. Analysts project sales will rise 18% to $54.8bn, the slowest growth rate since 2009.
Apple’s shares have dropped almost 30% since September, erasing about $190bn in market value, on concern that demand for iPhones and iPads is ebbing. Mr Cook overhauled most of the company’s product line ahead of the holiday shopping season, and results for the period will show for the first time whether the effort paid off.
"Sentiment could not be worse. It does take something fundamental to turn that, and we’ll see if they can deliver," said Thrivent Financial for Lutherans analyst Peter Karazeris.
Apple often reports results that surpass even the most optimistic projections, and it is possible it will do so again today. The company has exceeded analysts’ estimates for earnings in all but three quarters since at least 2006, data shows.
Yet, in a sign that investors are turning more bearish on Apple, the company is trading at a 52% discount to the Nasdaq Composite index on a price-to-earnings basis, a spread that has widened from a 20% discount in October.
Apple touched a record high of $705.07 on September 21. It rose less than 1% to $501.04 in German trading on Tuesday, after closing at $500 in New York on Friday.
Many analysts have reduced their estimates amid signs — such as a drop in component purchases — that demand may be weaker than projected for the iPhone, which accounts for more than half of Apple’s sales and profit. In the past three months, analysts’ profit predictions for Apple for fiscal 2013 have declined 7.5% to $46.3bn, or $48.84 a share.
"If iPhone 5 sales really are disappointing so soon in the product’s refresh, then it seems fair to worry about likely sales volumes in the next few quarters before the iPhone is next refreshed," Nomura Equity Research analyst Stuart Jeffrey wrote in a note when he lowered his outlook for Apple.
In January last year, Apple posted record first-quarter results, generating $13.1bn in profit on sales of $46.3bn.
One possible reason for the drop is the increasing prevalence of smartphones worldwide, especially in developed countries, meaning growth is slowing as the market becomes saturated. In the US, more than half of cellphone users have a smartphone, according to IDC. Many remaining customers are looking for alternatives to the newest iPhone 5, which starts at $199 with a two-year contract, said IDC analyst Ramon Llamas.
Samsung offers more than 80 touchscreen smartphones.
"It’s become more and more obvious that the iPhone isn’t the only smartphone on the block," Mr Llamas said.
Apple probably sold 48-million iPhones in the quarter, according to the average of analysts’ estimates.
Barclays analyst Ben Reitzes said comments from Mr Cook and chief financial officer Peter Oppenheimer on a conference call with analysts following the financial results will be the company’s most important in years. Apple needs to address questions about iPhone demand as well as whether profit margins are tightening because of the cost of making new products, he said. Apple said in October that its profit margins were lower because of the cost of overhauling its product line-up.
Six years after the debut of the iPhone and almost three years after the iPad’s unveiling, many investors are asking where Apple’s next area of growth will be.
One possibility is in developing countries such as China. Apple is considering the introduc tion of a lower-cost iPhone to appeal to customers and where mobile-phone carriers typically do not subsidise the purchase of new smartphones, people familiar with the matter said earlier this month. Without a wireless carrier’s subsidy, the cheapest iPhone now costs $450, while the top-of-the line model is $850.
"When you get into these emerging markets where there is no subsidy, that’s a lot of money," Mr Llamas said.
Apple’s business model of selling products at a high profit margin leaves it room to introduce a lower-cost device. Without doing that, it risks losing out on sales in the faster-growing part of the market, said RCM Capital Management MD Walter Price, which has 2-million Apple shares worth about $1bn.
"They have had this luxury of skimming the cream of the market, and those days are ending," said Mr Price. "Revenue growth is definitely moderating and margins are definitely going down."
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