Here's the Real Reason Investors Should Be Worried About Apple's iPhone 5
Updated to include UBS analyst comments
A recent Wall Street Journal report indicates that Apple may be cutting orders with suppliers who build the iPhone 5, potentially indicating less-than-anticipated demand for the company's newest smarthphone. The report, which cites anonymous sources, adds to a frenetic 2013 in the Apple rumor mill.
Previous media reports indicated Apple might start selling iPhones as low as $99 by year-end. However, Phil Schiller, Apple's head of marketing, quickly nixed such speculation .
Apple, at its 11 price-to-trailing-earnings multiple, seems to attract an ever-growing number of bulls who see America's most profitable company as an obvious 2013 value -- and skeptics who call the company a value trap and foresee a commoditization of its premium-priced tech products.
In the interim, the more urgent iPhone 5 story may have little to do with Apple or its shares.
As telecom giants Verizon and AT&T prepare to report fourth-quarter earnings, analysts are bracing for the full impact of smartphone subsidies and, in particular, the earnings hit that might come from an entire quarter worth of subsidized iPhone 5 smartphone sales.
Carriers already have indicated that Apple's newest smartphone will have an impact on earnings, even if trends like underlying subscriber and average-revenue-per-user growth indicate a strong outlook for the industry's top players.
Earlier in January, Verizon CEO Lowell McAdam said the company added 2.1 million wireless subscribers in the fourth quarter, "a truly impressive result," according to Craig Moffett of Bernstein Research. Still, the oftent bearish telecom analyst noted such subscriber growth may come at a cost, highlighting two January 8-K filings Verizon made with the Securities and Exchange Commission that indicate wireless service margins for the fourth quarter might fall on a year-over-year basis.
A decline in wireless margins as a result of subsidized new iPhone and Google(GOOG) Android-operated handsets would cut against three successive quarters where Verizon's margins have improved, according to a Monday note by Moffett. It means investors in Verizon and AT&T might have to temper expectations about sustainable wireless profitability.
On Monday, UBS analyst John Hodulik downgraded Verizon from 'Buy' to 'Neutral' on expectations of lower than expected wireless and wireline profitability and a lack of "positive catalysts." Still, in spite of fourth quarter earnings concerns, Hodulik noted a strong long-term outlook for the carrier.
"We continue to believe Verizon to be the leading wireless company in the U.S. given its network position, continued strong share gains, high single-digit service revenue growth and the highest margins in the industry," wrote Hodulik.