Ever since Apple (AAPL) unveiled its new iPhone 5C and 5S models on September 10, investors have seen a wild gyration in sentiment and stock price volatility. At first, investors were disappointed when they discovered that the two new iPhone models were very similar to the older iPhone 5 and that the supposedly lower priced iPhone 5C was being priced to aim at the high end of the market, contrary to what many had come to anticipate. Apple shares sold off by as much as 12%. However, a week later, investor pessimism turned into jubilation when they learned that opening weekend sales topped 9 million units which far exceeded expectation of 5 million - 6 million units. Share price subsequently rebounded sharply.
Judging by the almost universally positive reviews in the media touting the two new iPhone models and the iOS 7, I expected the momentum in Apple share price to carry the stock to a much higher level. Yet, the share price only barely made it back to the level prior to the new iPhone announcement before stalling and reversing in the past two days.
The selling could be due to profit taking or technical in nature as Apple share price was testing the trend line resistance formed from mid-August. On the other hand, I believe there are also several fundamental factors in play that might have kept Apple investors apprehensive about the near term prospects of the company.
Lack of Visibility Into iPhone 5S Supply Constraints
Of the two new iPhone models just released, iPhone 5S appeared to be much more in demand than the 5C. iPhone 5S models in all colors quickly sold out on the first day with expected shipping time slipping well into October while there were still ample supplies of iPhone 5C in many retail outlets and Apple's online store. It was estimated that the demand for iPhone 5S could be as much as 3 times of iPhone 5C.
Based on the supply-demand conditions for the two new models thus far, Apple either grossly underestimated demand for the 5S model or might have indeed been experiencing production problems which was rumored earlier in the year to involve the new fingerprint scanner found on the 5S model. Apple is now reportedly ramping up production of the 5S models but visibility is very limited as to when production could eventually catch up with demand. At the very least, the supply constraint problem is dampening or delaying near term sales. But if the supply constraint issue is not quickly resolved, current Street estimates of 50 - 55 million iPhone units for the December quarter could be at risk.
iPad and Mac Demand Still Soft
When Apple released its earnings for the June quarter, it surprised investors by revealing that iPad sales suffered another quarter of sequential decline as unit sales fell 25% from 19.5 million in the previous quarter to 14.6 million. The lack of a new iPad model during the June quarter might have played a role but the higher price of the iPad relative to much cheaper Android tablets were another major factor in iPad giving up market share to Android tablets.
Interest in iPad in the last two months does not appear to have picked up, as evidenced from the relatively flat level of interest in iPad keyword searches in Google Trends. This could be a strong indication that iPad unit sales may suffer another lackluster September quarter. Apple is expected to announce a new iPad in the upcoming weeks but the new iPad model might further pressure overall gross margins if it were priced more competitively with other Android tablets.
Mac unit sales have also been in a slump in the past few quarters. As the chart below shows, Mac unit sales remained flat at an average of 4 - 4.5 million per quarter. Recent refreshes in iMac and MacBook Air models seemed to have helped in stabilizing sales but failed to stimulate sales. As the global PC market is expected to continue its downward slide, I do not expect Mac sales to experience any meaningful pickup in sales volume in the near term.
(Source: Bare Figures)
iPad and Mac sales together accounted for 32% of total revenue in the June quarter. Continued softness at these two key product segments does not bode well for the overall growth of the company which is now more dependent on the prospect of iPhone sales. This could mean that the share price also becomes more vulnerable to any unexpected hiccups on iPhone sales, especially during the mid to later stages of the iPhone product cycle.
Street Estimates Are Still Relatively Conservative
As the chart below shows, there has only been a modest increase in the earnings estimate for the September and December quarters in the past few weeks. Analysts as a group have become more positive on the stock but uncertainty about whether Apple can maintain healthy margins on its new products seemed to be lingering. There was also the question of iPhone "channel fill" with regards to iPhone inventory and "sell-through" vs. "sell-in". In time, analysts may raise the estimates further once they have a better grasp of these issues as more information become readily available.
(Source: Zacks Investment Research)
After rising more than 20% from the July low, Apple stock price seems to have mostly priced in the initial favorable reaction to the new iPhone release. But investors still have to contend with some of the fundamental issues that are negatively impacting the company and the stock price likely needs another catalyst for it to move higher. It could come in the form of a new iPad, a done deal with China Mobile to expand the distribution channel, better demand-supply balance conditions, or more enthusiastic analysts' recommendations supported by a bigger increase in consensus estimates. From a risk management perspective, the better risk-reward option may be to stay on the sideline until there are more compelling reasons to own the shares in conjunction with the share price regaining upward momentum above the trend line resistance level that is now holding back the share price.