If Apple (AAPL +2.97%) investors thought they had already seen shares hit rock bottom at $435 shortly after last quarter's earnings release, they were wrong. As the sequester technically begins today and the market opened lower, Apple gapped down and was significantly lagging the market with losses of 2%, tapping a fresh 52-week low below $432 first thing in the morning.
What was rattling shareholders?
It's over
The only notable commentary out before the close was a research note from BMO Capital. The Mobile World Congress, a conference where gadget makers like to show off their newest mobile devices, wrapped up last night in Barcelona. Of course, Apple never attends MWC since it likes to unveil its products on its own terms, and the Mac maker pulled out of all third-party trade shows years ago (even Macworld) as it was looking to take further control over its press events.
MWC still has important implications for Apple, though, since many of its competitors attend, providing a useful preview of what rivals have up their sleeves. It's for this reason that analyst Keith Bachman had some negative things to say about Apple's prospects.
After conversations with wireless carriers and distributors that operate in Europe, Latin America, and the Middle East, the general consensus is that while the iPhone 5 is a solid device, it's simply not "materially different" from the previous generation iPhone 4S, while competing flagship devices like Samsung's Galaxy S III are grabbing more attention. These mobile entities believe that the iPhone needs a larger display in order to effectively compete.
Bachman is modeling for 37.8 million iPhone units sold in the current quarter, which should decline sequentially to 34.5 million units in the June quarter. iPad units are estimated at 18 million and 19 million over the next two quarters, respectively. The analyst thinks these estimates are still "reasonable" but acknowledges that there's more downside possibility than upside given the competitive landscape.
Timing is everything
While Tim Cook gave no solid clues at the annual meeting on when Apple will increase its dividend payout, Bachman thinks this announcement will come before the next earnings release. It's widely considered the next big catalyst for the stock (assuming the iPad product cycle has indeed been pushed out to later this year).
Apple's fiscal second quarter report takes place at the end of April, and last year Apple announced its dividend reinitiation in March, so this timing would make perfect sense since companies typically change dividend payouts on an annual basis.
How bad could it be?
In Bachman's view, Apple "absolutely" needs to expand the iPhone both down-market into the more affordable mid-range segment as well as up-market with a larger screen to address the growing phablet trend. Bachman adds, "We think Apple needs to and will do both." My thoughts exactly.
Overall, Bachman is still sticking with his "outperform" rating and $580 price target, which makes the sell-off today seem a little unwarranted. While the analyst is addressing some very legitimate risks facing the company, we're still talking about over 33% upside from current levels if his target comes to fruition.
Even without these product catalysts, Apple still owns developed smartphone markets like the U.S. and Japan, and from a global perspective the iPhone is still crushing the Galaxy S III. Even the previous generation iPhone 4S (3.5-inch display) outsold the newest Galaxy S III (4.8-inch display) worldwide in the fourth quarter. It's undoubtedly true that Apple needs to broaden its iPhone horizons, and the sooner it does this the better, but the actual data shows that the situation is not nearly as dire as what investors are pricing in right now.
