Apple Tumbles On iPhone Price Cut; Analysts Leaving Estimates In Place

Apple (AAPL) shares Thursday morning extended Wednesday’s skid, as the Street tries to figure out what to make of the company’s stunning $200 price cut on the 8 GB iPhone. As I live blogged from the Apple event Wednesday, the company unveiled an array of new iPods, refreshing the entire product line and adding new models, in particular the new iPod Touch and a totally revamped Nano. Other news from the event included plans to sell ring-tones from iTunes; a wireless version of the iTunes music store; and a partnership with Starbux (SBUX).

But the focus Thursday morning, you will not be surprised to hear, is on the price cut.

In general, the Street reaction is fairly enthusiastic; the interpretation is that the company can now ramp up its share in the highly competitive handset market. But there are margin implications from cutting the price by a third, offsetting the expected volume gains. In the end, most analysts simply left their estimates in place.

Here’s a quick run down on Thursday morning’s thoughts on Apple’s news from the Street:

Ben Reitzes, UBS: New iPods “do not disappoint,” but price cut “a stunner.” He maintains Buy rating and $175 target, and writes “while investor reaction to the iPhone price cut could be negative near-term, we believe unit demand will be stimulated and the jury is still out.”

Bill Shope, J.P. Morgan: He says the price cut “suggests that iPhone sales are likely tracking below our recently reduced 1.5 million estimate” for units sold through the end of September. “We are encouraged, however, that investor expectations for the device are set to become more realistic and that the lower price point can stimulate units this holiday season. Shope says the company has an “impressive” holiday lineup, but that “margin and iPhone expectations were too lofty and could come under pressure.” He maintained his Neutral rating.

David Bailey, Goldman: The price cut was “sooner and deeper” than expected. He says it cuts FY 2008 EPS by 10 cents; but he did not change estimates, asserting that cannibalization assumptions have been too high. He says Apple “continues to develop new models and features for iPod that can drive serious upgrade cycles and volumes.” He says all of the announcements taken together, plus strong Mac sales, “should be enough to generate higher volumes and upside to earnings.” No change in estimates or Buy rating.

Chris Whitmore, Deutsche Bank: Expects lower iPhone price point to drive incremental demand; says Apple is “likely willing to concede lower near-term hardware margin in order to capture a recurring, monthly annuity from AT&T (T).” He says “the net financial impact” should be “additive.” Maintains Buy rating and $200 target.

Gene Munster, Piper Jaffray: Price cut is a “surprise,” but should accelerate adoption. Apple now has “the strongest iPod lineup ever,” providing potential for upside to Street’s iPod unit estimates. Munster does not think the price cut is indicative of slow iPhone adoption, but instead says it is “a reflection on Apple’s desires to be a legitimate player in the mobile handset market within 1-2 years vs. our previous expectation of 2-3 years.” Repeats Outperform rating.

Andy Hargreaves, Pacific Crest: Asserts that “the price decline will prompt increased unit volume,” and lifted his fiscal 2008 estimate to 9.5 million iPhones from 8.2 million. Also says that to drive adoption of video devices, it will need to broaden video content selection on iTunes. Repeats Outperform rating.

Harry Blount, Lehman: Sees stock driven higher from here on back-to-school sales, new product cycle, Leopard, iPods, international iPhone launch and potential next generation iPhone at MacWorld in January. He maintains his Overweight rating. “We believe this this price cut makes it more likely that Apple will introduce a new version of the iPhone at January’s MacWorld,” he writes.

Robert Semple, Credit Suisse: The price cut “overshadows” a strong iPod lineup, he writes. “While Apple noted that it is still on track to sell its 1 millionth iPod by the end of September, we believe Apple was likely behind its internal plan and needed to exercise the elasticity lever to achieve its targets,” he writes. “Ultimately, a more competitively priced iPhone will drive greater share gains and unit growth, but near-term implications for cash flows are disappointing.” He cut his FY 08 EPS estimate to $4.50 from $4.66. His rating remains Outperform.

Kathryn Huberty, Morgan Stanley: Says the company has a “winning combination” for the holidays. She views price cut at “a positive move to stimulate holiday demand in a high volume, high margin segment of the business,” and says the cut “could generate meaningful incremental unit demand.” Huberty maintains an Overweight rating and $150 price target.

Mike Abramsky, RBC: Price cut was sooner than expected. “While the lower price itself was not unexpected, the speed of the cut - 68 days into launch - was a surprise…It also risks upsetting early iPhone purchasers. After deciding to cut price, Apple likely moved quickly to avoid alienating customers further and to maintain sales momentum.” He maintains his Outperform rating.

Richard Windsor, Nomura: “We struggle to see how the iPhone price cut will benefit the bottom line as volumes need to be much greater just to get to the same level of profit…this move is likely to meaningfully increase the competition in smartphone as Apple is now pricing at a point where we see meaningful shipments.” He says the news is negative for Nokia (NOK), as “there is now credible competition for some of its higher priced smartphone products.”

Trip Chowdhry, Global Equities Research: Downgraded Apple to Equal Weight, with new $130 price target. “Our research indicates that upside to Apple’s iPhone is somewhat muted…Apple’s iPhone is suffering from significant strategic and tactical missteps and Apple is probably unlikely to achieve the stated 10 million unit goal by the end of 2008.”

Comments

[John Warren...:]

If anything I find these comments somewhat on the conservative side, but that's the name of your paradigm. I am a grey-beard paradigm shifter and I think that Steve Jobs' only limitation is that he is not moving more aggressively in European and Asian markets. Where, for example, are the Apple Stores in Berlin, Paris, Saint Petersburg et alia. Interesting that VW, Mercedes Benz and Jaguar are showing Jobs the roads to the future. Apple with little help is potentially huge in Europe.

2007 Sep 06 02:07 PM

[peter02l:]

What analysts should be saying is that the $200 price cut will shave about $2 billion from sales given the estimated 10 million units by the end of 2008. So Apple should sell an additional 5 million iPhones to match sales, and about 20 million to match profits to pre-price-cut levels. That's 30 million units by the end of 2008! Can this be possible? Apple sold over 20 million iPods last holiday season. Can the sell 10 million iPhones this year? One would hope they have surpassed the 1 million target for this quarter and negotiated better pricing for components before taking such a bold step. After all, Apple is not a company that would sell a product at a loss.

2007 Sep 06 02:28 PM

[Ezzyme:]

Let's take this a little farther. Say component prices are the same and they only meet projections of 10 million iPhone sales next year. Let's split the difference between the 4 gig and 8 gig pricing and say the average price cut reflected in estimated future sales is $150. That's $1.5 billion not only in reduced revenue but in PROFIT. That $1.5 billion will come directly off the BOTTOM line. In this scenario, 2008 EPS will be reduced $1.72 and at a P/E of 38 that's a $65 stock value haircut. Thank you Steve.

2007 Sep 07 09:00 AM