By Thomas Gryta and George Stahl
Apple Inc. (AAPL) shares fell as much as 12% Thursday as slowing
revenue and profit growth further fanned investor concerns about
the company's momentum and consumer demand for its devices.
In its highly anticipated December quarter report, Apple
reported its slowest sales growth in more than three years, despite
introducing a new smartphone and a smaller tablet. Meanwhile,
Apple's flat earnings reflected the higher costs the Cupertino,
Calif., company is facing as it tries to keep up with growing
competition, which may be cutting into the iPhone's market
share.
"We suspect Apple's results will do little to assuage investors'
concerns about share and profitability," Citigroup analyst Glen
Yeung said.
Apple shares hit a low in early trading Thursday of $450.66,
their worst point since Jan. 30. The stock recently rebounded to
$461.50 in brisk trading, down 10% on the day. The slide has erased
nearly $50 billion in the company's market value, which has fallen
by more than a third from its all-time high in September. Apple
still remains the largest U.S. company by market cap, although its
lead over Exxon Mobil Corp. (XOM) is now about $15 billion.
As a result of Apple's price decline, short selling--or betting
that the stock will fall--has been restricted Thursday. The
restriction means that each short sale will now lead to an uptick
in the share price. At year-end, about 17.9 million Apple shares
were sold short, amounting to about 2% of shares outstanding.
Mr. Yeung noted that while Apple shipped a record 47.8 million
iPhones in the December quarter, the company's footing in the
smartphone market likely slipped. According to the analyst, iPhone
sales grew 39% year-over-year, after adjusting for the extra week
in the year-ago quarter.
"While good, the results were not great: The global handset
market grew 49% [year-over-year], implying Apple has lost market
share since adding the iPhone 5," Mr. Yeung said.
On a conference call late Tuesday, Apple Chief Executive Tim
Cook fought the idea that the iPhone is struggling. He stressed the
growth potential of China, where iPhone sales doubled in the
quarter, and its launch in other countries where it is making its
debut on high-speed LTE wireless networks.
The CEO also stressed that the phone faced supply constraints in
the December quarter for both the iPhone 5, and the iPhone 4,
although the popularity of the older device may suggest that
consumers are seeking Apple products at a reduced price,
highlighting the need for Apple to launch a lower-priced
iPhone.
"We believe that the high-end market is likely to grow in the
mid-to-low teens [year-over-year] over the next few years and that
the majority of growth will happen in the lower-end market," said
Piper Jaffray analyst Gene Munster, who expects the lower-priced
iPhone to come in the September quarter.
Jefferies analyst Peter Misek also sees Apple losing the
screen-size war in smartphones as demand is moving more toward
screens of about five inches.
"Slowdown in iPhone sales is real and material," Mr. Misek
said.
Mr. Cook insisted that Apple won't chase "revenue for revenue's
sake", insisting that the company can focus on quality while
maintaining market share for the iPhone. He used the iPod media
player as an example of "doing different products at different
price points and getting a reasonable share from doing that."
He declined to discuss Apple's pricing strategy, but noted an
"opportunity of getting products to customers and a percentage of
those buying other Apple products."
In the case of the iPad, the popularity of the smaller,
lower-priced version known as the Mini is hurting revenue growth,
Mr. Yeung said. According to his calculations, the success of the
Mini contributed to a $101 decline in the average iPad selling
price, leading to a bigger percentage increase in tablets sold,
48%, than in tablet revenue, 17%.
Mr. Yeung sees "the cannibalization effect of the Mini"
continuing to stifle revenue growth. The analyst sees Mini sales
rising between 20% and 40% in the March quarter, with sales of the
larger iPad declining 30% to 40%. The mix will result in a 19% drop
in the tablet's average selling price.
Apple's results for the December quarter also are hurting the
company's semiconductor suppliers. Shares of Cirrus Logic Inc.
(CRUS) fell 9%, while Skyworks Solutions Inc. (SWKS) slid 1.8%.
Bigger companies like Broadcom Corp. (BRCM), down 1.4%, and
Qualcomm Inc. (QCOM), off fractionally, are seeing more modest
declines.
In raw numbers, analysts generally concede that Apple is a
well-performing business but overwhelming expectations from
consumers and Wall Street will shift focus on the company's
struggles as financial projection shift downward.
Nomura analyst Stuart Jeffrey said Apple must launch new
products to re-accelerate growth, but there are few announcements
expected before the summer. He notes that the next iterations of
the iPhone and iPad will likely be incremental, something that
won't help the already present competitive pressures.
"In absolute terms, Apple's financial performance is still
exceptional, but the scope for material earnings upside appears to
have gone," he said.
Write to Thomas Gryta at thomas.gryta@dowjones.com and George
Stahl at george.stahl@dowjones.com
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