AAPL: iPhone slump, Samsung competition drops Apple quarterly profit for first time since 2003

Apple CEO Tim Cook speaks during an event

Apple CEO Tim Cook speaks during an event to announce new products in San Jose, Calif. (Oct. 23, 2012) (Credit: AP)

Apple Inc.'s quarterly profit is projected to shrink for the first time in a decade, hurt by new products with lower profit margins and slower growth in iPhone sales.

Fourteen analysts have reduced their estimates for Apple in the past four weeks, as shares in the world's most valuable technology company continue their slide from a September record high.

Competition from Samsung Electronics Co. is also weighing on the stock, and pressure is mounting for Chief Executive Tim Cook to introduce hit products to reignite sales.


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An earnings report Tuesday may show that fiscal second-quarter net income declined 18 percent to $9.53 billion, or $10.02 a share, according to analysts' estimates compiled by Bloomberg. Revenue is projected to show a rise of 8 percent to $42.4 billion, the slowest growth rate since 2009.

"The market is in show-me mode for Apple," said Laurence Balter, an analyst at Oracle Investment Research who is based in Fox Island, Washington, and has a buy rating on Apple. "The market needs to see some evidence that the future looks bright because that candle is flickering."

To placate investors, Apple may increase its dividend or boost share buybacks. Katy Huberty, an analyst at Morgan Stanley, said an announcement may come with the earnings release. Toni Sacconaghi, an analyst at Sanford C. Bernstein & Co., predicts it will come later.

Apple may raise its current quarterly dividend by 17 percent to about $3.10 a share, according to a Bloomberg estimate, based on payouts of other large technology companies, Apple's projected earnings and the amount of cash it holds.

GROWTH ENGINE

Apple had $137.1 billion in cash and investments at the end of December and has faced pressure from investors including hedge fund manager David Einhorn to return more to shareholders.

The company's profit margins have been squeezed by higher component costs and the introduction of lower-priced products such as the iPad mini. Apple probably sold 35.4 million iPhones in the latest quarter, compared with 35.1 million a year earlier, according to estimates compiled by Bloomberg. Bernstein's Sacconaghi predicts 25 million units will be sold in the current quarter.

The slide comes as Samsung prepares to start selling its Galaxy S4 smartphone this week. The Suwon, South Korea-based company is Apple's biggest rival and has challenged the iPhone's dominance by selling a slew of handsets with different styles, screen sizes and prices.

"Things have changed for Apple," said Alex Gauna, an analyst at JMP Securities in San Francisco. "The competition is more intense."

Supplier Woes Evidence of weakening demand has been trickling out from Apple's suppliers. Hon Hai Precision Industry Co., which manufacturers the iPhone and iPad in China, reported its biggest revenue slide in at least 13 years this month. Cirrus Logic Inc., a maker of chips, reported an inventory glut that suggested slowing iPhone sales. Verizon Wireless also reported last week that it sold 2 million iPhone 5s, weaker than some analysts had predicted.

The sales decline will continue, according to Sacconaghi. He said in a research note to investors last week that Apple will give an outlook Tuesday for the current quarter that's "meaningfully below" the $8.63 billion of profit and $39 billion of sales now predicted by analysts.

Investors sent the stock below $400 last week, the first time it has traded below that level since December 2011. Apple shares fell less than 1 percent to $390.53 on April 19, leaving the stock down 45 percent from a September record high.

PRODUCT PIPELINE

Apple's devotion to keeping details of product secret before they are unveiled has contributed to shareholder concerns, Oracle Investment's Balter said. While a new television product and watch-like wearable computer are possible, investors aren't showing faith in the post-Steve Jobs management team to come up with a breakthrough gadget, he said.

"Nobody believes the secret anymore," Balter said. "It was OK when Steve Jobs would say we have some great things in the product line, but right now that credibility has been lost."

Not all analysts predict that Apple will report a downbeat quarter. Mark Moskowitz, an analyst at JPMorgan Chase & Co., said shares are sliding because Apple hasn't built the typical anticipation for new devices after overhauling almost its entire product line late last year.

EARNINGS SURPRISES

Analysts have a history of underestimating Apple. It has exceeded analysts' predictions in all but three quarters since at least 2003, according to data compiled by Bloomberg.

The company also continues to be the most profitable in the technology industry. Apple's projected quarterly profit is more than what Google Inc. and Microsoft Corp. reported last week combined. In the smartphone market, Apple accounted for about 70 percent of all profits in 2012, according to Canaccord Genuity.

Investing in Apple by weighing its continued profitability against slowing growth and declining shares is a classic "falling knife" dilemma, according to Gauna of JMP Securities.

"The people who are brave enough to catch a falling knife properly, at the bottom of a decline like this, tend to be rewarded," Gauna said. "Those who try to catch it too early will lose a finger."

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