Apple's invincibility fades on iPhone miss

SAN FRANCISCO: Apple biggest success has become

its biggest risk factor.

The iPhone revolutionized the smartphone industry,

driving Apple's expansion into Europe and China and,

after just half a decade, yields about half its annual

$100 billion revenue haul.

But the world's most valuable technology company --

which throughout the global recession near-

unfailingly smashed Wall Street forecasts -- is

beginning to lose its aura of invincibility.

The company has missed Wall Street targets twice in

under a year. CEO Tim Cook may now have to worry

more about economic and product launch cycles, and

the whims of fickle consumers.

Tuesday's numbers also showed the impact of the

economic slowdown in Europe on its sales,

something a smaller, less-exposed Apple was able to

dodge a few years ago.

"Apple is a little bit more vulnerable," said Giri

Cherukuri, head trader at OakBrook Investments.

"There are chinks in their armor now."

The reason for its vulnerability: its very success and

size.

"When they were small enough, they could power

through it," Sterne Agee analyst Shaw Wu said. "Now

it's so pervasive that it's a lot harder."

The change in sentiment was evident in Cook's call

with investors on Tuesday following a miss in fiscal

third quarter earnings numbers.

Cook assessed how the global economy --

particularly in Italy, France, Greece, and China --

impacted iPhone sales. This stood in stark contrast to

his comments in 2009, when the world's credit

system froze and global economy was grinding to a

halt in the aftermath of Lehman Bros' collapse.

"We just spend our time projecting our business and

leave the economy forecasting and comments to

economists," Cook said during an earnings

conference call nearly three years ago -- before the

launch of the iPad and when the Mac computer

generated more revenue than the iPhone.

On Tuesday, Cook was somewhat more expansive in

his assessment of the business environment.

"We are certainly seeing a slowdown in business in

that area," Cook said of Western Europe.

"Fortunately, the US and China, although I realize it's

getting a lot of press, we're not seeing anything there

that we would classify as an obvious economic

issue."

Branding sheen

The blockbuster smartphone that adds a special

gloss to the Apple brand is a highly cyclical product.

Buyers emerge in droves every time a new version is

launched, lining up at stores overnight, and snarling

supply for the device.

Its popularity has heightened speculation around the

device every year as over 100 million yearly

customers decide when to switch to a new model,

whether to buy now or hold out for a better but same-

priced phone.

The now-more predictable line-up also means

consumers are more attuned to product life cycles

and launch timelines, something that Apple goes to

great lengths to keep secret.

In fiscal 2009, Apple grew 35 per cent despite a

global credit crisis that hurt most companies. But

Apple generated only $6.75 billion from iPhones that

year.

It raked in over $16 billion in iPhone sales last

quarter alone, a little under half of total revenue.

"When you become so reliant on a single device then

that device's life cycle is going to have a much

bigger impact on the results," Morningstar analyst

Michael Holt said.

Sales of the iPhone slipped 26 per cent sequentially

last quarter, reducing margins by 460 basis points to

42.8 per cent.

Investors had already lowered their expectations, but

they did not expect the company to miss altogether.

A lot of the blame was placed on the pause prior to

the launch of a new iPhone, which some fear is

becoming a yearly trend.

"We expect to see greater volatility in Apple's

quarterly results going forward due to the growing

importance of the product cycle," Holt said, adding

that more consumers now are tuning into the chatter

around expected new products.

That's prompted Wall Street to take Apple's

notoriously conservative earnings forecast more

seriously now. On Wednesday, JPMorgan cut its price

target on the stock to $675 from $695, Raymond

James slashed it to $730 from $800, and Canaccord

Genuity reduced its target slightly to $797. Goldman

cut its price target to $790 from $850.

Finally, as consumers await the new iPhone --

expected to be a complete redesign with a bigger

screen -- competition is growing from the likes of

Samsung Electronics' new Galaxy S III.

But analysts and investors say that the choppiness in

iPhone sales doesn't matter as long as Apple's strong

growth resumes during the holiday quarter after the

anticipated new iPhone hits the stores. Expectations

are high that Apple will launch a phone that will

again beat the competition in terms of features.

And the bullish view of Apple's growth is evident in

the stock price, which is up 42 per cent for the year

despite a 4.3 per cent drop on Wednesday on the

Nasdaq market.

"This is likely one of the last buying opportunities

ahead of the iPhone 5 launch as we expect

headwinds to reverse in the calendar fourth quarter,"

Morgan Stanley's Katy Huberty said.