iPhone 4 Glitches Could Knock 5% Off Apple's Stock Price

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Includes: AAPL, BBRY, GOOG, NOK, T
by: Trefis

Since the release of the iPhone 4, Apple (NASDAQ:AAPL) has received numerous complaints concerning pre-order availability and software issues. Apple competes with Google (NASDAQ:GOOG), Nokia (NYSE:NOK), Research in Motion (NASDAQ: RIMM) and Motorola (NYSE: MOT) in the mobile phone market.

We believe that rising consumer dissatisfaction could hurt iPhone sales and damage Apple’s reputation, which would depress the company’s stock value. We estimate a downside of 5% to the $296 Trefis price estimate for Apple’s stock if its mobile phone market share increases at a slower rate to around 10% by 2016. Our analysis follows below.

Here are some of the problems that plagued the iPhone 4 launch:

1. Ordering snafus: Apple sold 600,000 iPhone 4 units on the first day of its pre-launch sales period. Pre-orders were 10x higher for iPhone 4 than they were for iPhone 3GS on the first pre-launch sales day last year. But AT&T’s (NYSE:T) servers couldn’t handle the surging demand. As a result, the online preorder service had to be suspended.

2. Antenna issues: Many users have reported problems with the phone’s antenna. A weak antenna can lead to degraded cellular signal and dropped calls. Apple maintains that the problems were caused by a software bug that caused the phone to display more reception bars than were actually received, creating the illusion of a strong cellular signal.

Consumer Reports, a respected U.S. magazine that evaluates commercial products and services, has declined to recommend the iPhone 4. After conducting several tests, the magazine announced that there was a problem with the phone’s reception, contrary to Apple’s claim. We believe this could have a negative impact on Apple’s reputation and could lead to Apple losing some brand value of its products.

3. Yellow spots: Some users found yellowish spots and bands on the phone’s screen.

4. Inventory problems: Apple has said that it won’t be able to sell the white version of iPhone 4 until the second half of 2010.

iPhone 4 problems could hurt sales of future versions

In the past, customers have greeted each new iPhone release with rapturous enthusiasm. The iPhone faithful have been known to queue up for hours to buy the latest model during the first few days after each launch. Going forward, consumers may be more cautious about pre-ordering the latest iPhone. This will certainly hurt iPhone sales, along with Apple’s market share in the long term.

Downside for Apple’s stock

We currently estimate that iPhone’s market share will rise from around 2% in 2009 to around 11% by the end of the Trefis forecast period. This suggests that Apple will sell around 200 million iPhones by 2016 at a price point of around $370.

But the recent bad press could certainly hurt iPhone sales. In a scenario where Apple’s mobile phone market share increases slowly to around 10%, we forecast a 5% downside to our $296 price estimate for Apple’s stock.

You can modify the chart below to track the relationship between Apple’s mobile phone share and its stock price:

Disclosure: None