Could This Be the Demise of Apple's Earnings?

Fears of margin pressures are mounting going into Apple's (NASDAQ: AAPL  ) earnings report on Wednesday, with a lot riding on how Apple's iPhone 5 performs. That's because the iPhone brought in over 47% of the company's revenue last quarter, and the iPhone 5 commands a 68% gross profit margin. If the iPhone 5 doesn't deliver as expected, the company's overall gross profit margin will suffer, and investors aren't going to be happy. I've already discussed one way the iPhone's average selling price will decline, but now I'll be focusing on why smartphone users would be less compelled to upgrade to Apple's latest and greatest smartphone, the iPhone 5.

Infrastructure lacking
Aside from the larger four-inch screen, one of the main selling points of the iPhone 5 over previous generations is the fact that it offers global LTE coverage with download speeds as high as 100 Mbps. The problem is, LTE is such a new technology that the worldwide infrastructure to support it is currently lacking. According to the Global Mobile Suppliers Association, there are currently 145 LTE commercial networks available in 66 countries, which pales in comparison to the worldwide availability of 3G networks (254 carriers in 118 countries).

Quick math
Considering how the iPhone 5 is available in 101 countries, a general lack of global LTE coverage could act as a major headwind to iPhone 5 demand. If a country or specific network lacks LTE, why would a smartphone user in that region invest in an iPhone 5, especially when there are excellent (and cheaper) alternatives in the iPhone 4 and 4S? Could the iPhone 5's larger 4-inch screen save the day? If a recent ChangeWave survey has any indication, the results are not looking promising. Only 52% of North American respondents were interested in a screen size between 4 and 4.9 inches. Will that be enough interest to drive strong sales of the iPhone 5?

Not Apple's fault?
Perhaps it's not that demand for the iPhone 5 was weak, it's that global availability of LTE is still far behind 3G, giving consumers in LTE-lacking regions little incentive to purchase an iPhone 5 over an iPhone 4 or 4S. If that's the case, this will become one more reason why you should sell Apple today.

There's no doubt that Apple is at the center of technology's largest revolution ever, and that longtime shareholders have been handsomely rewarded with over 1,000% gains. However, there is a debate raging as to whether Apple remains a buy. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on both reasons to buy and reasons to sell Apple, and what opportunities are left for the company (and more importantly, your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.


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Comments from our Foolish Readers

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  • Report this Comment On January 22, 2013, at 8:51 PM, eldernorm wrote:

    Sorry but this sure looks like a hit piece. Apple might fail cause not enough people in the world have LTE??

    Maybe they are afraid of rectangular devices?

    Maybe people just hate things that begin with "A" ?

    And if Apple does not make $200 BILLION in sales everyone will hate Apple and not buy shares!

    Then everyone will sell shares of Apple cause the company ONLY makes 70+% of the world profit of smart phone sales.

    Just how dumb do these writers think we are? $140 Billion in cash and no debt make Apple a bad buy.

    Just a thought.

  • Report this Comment On January 22, 2013, at 9:54 PM, TMFTopDown wrote:

    Amaradio -- per the disclosure, both the Motley Fool and the author own shares of Apple; neither are shorting the stock.

    This article was intended to frame investor thinking about a potentially significant headwind the iPhone 5 faces going into earnings.

    Thank you,

    Steve Heller (TMFTopDown)

  • Report this Comment On January 22, 2013, at 10:23 PM, Emperor2 wrote:

    I guess the author wrote this before Verizon & ATT reported their latest iPhone sales. This article might have more validity if those sales results were taken into consideration. As written, this article will be quickly dismissed by most reader.

  • Report this Comment On January 23, 2013, at 12:02 AM, HiramWalker wrote:

    Samsung is eating Apples crumbs for lunch. Apple gets 70% of the profit, while Samsung cranks out twice as much product for less than half as much profit. If Verizon is any example, the next phone these disappointed Samsung buyers will get will be an Apple. It seems the formerly 100% Android Verizon, whose sales staff try very hard to push you to buy Android, now sells mostly iPhones despite themselves.

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