Bloomberg News

Apple Growth Seen Pausing as IPhone Buyers Await Model

July 23, 2012

Apple Growth Seen Pausing as IPhone Buyers Await New Model

A customer with an Apple Inc. iPhone 4S in Tokyo. Photographer: Tomohiro Ohsumi/Bloomberg

As iPhone fans await the release of a new model, they are delaying purchases and may cause Apple Inc. (AAPL:US), the world’s largest company by market value, to post its slowest sales and profit growth in more than two years.

With a redesigned model probably arriving by October, analysts (AAPL:US) estimate that sales of iPhones -- Apple’s biggest source of revenue (AAPL:US) -- slid in the fiscal third quarter from prior periods. While analysts predict that the next iPhone will be the best-selling smartphone yet from Cupertino, California-based Apple, the purchasing delays will probably weigh down results until the device hits stores.

“People are waiting,” said Andy Hargreaves, an analyst at Pacific Crest Securities in Portland, Oregon. Apple will sell about 25.4 million iPhones, he estimates, compared with 35.1 million in the previous quarter. “It’s going to be bad now, but great later.”

A similar slowdown occurred ahead of last year’s iPhone 4S release in October, causing Apple’s shares (AAPL:US) to slide when the company reported profit that fell short of analysts’ estimates for the first time since 2003. The stock slipped 0.1 percent to $603.83 at the close in New York.

Apple hasn’t said when it will unveil a new iPhone, and has given no details about plans for the product. Yet the dip in unit sales underscores how speculation about Apple’s plans, including a slew of websites dedicated to publishing rumors about new devices, can lead potential buyers to sit on their wallets while waiting for a new product.

‘Tech-Savvy’

“Customers are increasingly tech-savvy and they want to have the latest and greatest,” said Anthony Scarsella, the chief gadget officer at Gazelle.com, a website that buys and sells used iPhones and other consumer electronics. He said people wind down trading in their iPhones about four to six months ahead of an iPhone release. “It’s something we definitely see year after year.”

Tomorrow, Apple will probably report profit grew 35 percent to $9.86 billion, according to the average of analysts’ estimates compiled by Bloomberg. Sales are projected to rise 31 percent to $37.3 billion. While that kind of growth would outpace gains by most of Apple’s technology peers (AAPL:US), it would be the company’s slowest since 2009.

Apple is preparing to overhaul the look of the iPhone and has placed orders with suppliers for screens that are bigger than phone’s current 3.5-inch screen, people with knowledge of the matter said in May.

Jim Ferrer, a commercial insurance broker in San Francisco, is among those waiting for the next iPhone. He bought the first model -- known just as the iPhone -- when it was released in 2007 and has held on to it ever since.

‘Many Changes’

Ferrer considered getting the iPhone 4S, and then decided to delay the purchase when he saw that the newest model may be lighter and have a stronger processor that will make applications run faster.

“There are so many changes that keep coming out that I want to make sure I get the right one,” he said. “Then I’ll stick with it.” Ferrer browses the Internet several times a week to check out the latest rumors about the next iPhone.

Another potential barrier to near-term sales is a weak global economy that’s crimping consumer spending, as well as changes by carriers including Verizon Wireless that extend how long a customer must wait to get a subsidy for a new device, said Pacific Crest’s Hargreaves.

Apple also is facing competition from rivals including Samsung Electronics Co. (005930), which according to NPD Group is the world’s biggest seller of smartphones. Samsung released the Galaxy S III phone in May.

Shares Gain

Still, Wall Street analysts have a history of underestimating Apple’s results. The company’s earnings have exceeded average estimates every quarter except one since at least 2003, according to data (AAPL:US) compiled by Bloomberg.

Investors are shrugging off concerns about Apple’s quarterly results and are instead looking ahead to the next iPhone, according to Gene Munster, an analyst at Piper Jaffray Cos. So far this year, Apple’s shares have risen 49 percent. After conducting a customer survey, Munster says more than 80 million iPhones will be sold when the new model is released.

Munster said iPhone sales may be better than many analysts are projecting in the fiscal third quarter, in part because of demand in China, where the device went on sale in January and is now Apple’s second-largest market behind the U.S.

After Verizon Wireless said last week that it activated 2.7 million iPhones in the period, Morgan Stanley analyst Katy Huberty said Apple’s unit sales of the smartphone may top 31 million.

Twitter Mentions

Even so, anticipation for the next model probably curbed second-quarter results to some degree, Munster said. The term “iPhone 5” is mentioned on Twitter Inc.’s website about every 11 seconds, he said.

“It’s already having some impact,” Munster said.

Delayed iPhone purchases will have their biggest effect on Apple’s financial results during the current quarter, which ends in September. Toni Sacconaghi, an analyst at Sanford C. Bernstein & Co., said last week that Apple is likely to provide an “unusually conservative” outlook for the period.

Besides sporting a larger screen, the new iPhone will probably have a thinner body and a more powerful processor, according to Munster and other analysts. They also say it will work with the faster so-called long-term evolution wireless networks being rolled out by carriers such as Verizon Communications Inc. (VZ:US) and AT&T Inc. (T:US)

IPad Cushion

Any third-quarter drop in iPhone sales also may be partially balanced out by iPad purchases, according to Horace Dediu, a former analyst at phone-maker Nokia Oyj (NOK1V) who now publishes industry research at Asymco.com.

In addition to individual customers, schools and companies are buying the leading tablet computer, he said.

“There will be a significant story there,” he said.

Apple’s earnings reports have consequences for the broader market. The company, which also makes the iPod music player and Mac computers, accounts for more than 12 percent of the valuation of the Nasdaq Composite Index (CCMP), meaning fluctuations in its stock price can influence pension funds, mutual funds and other investments tied to the benchmark index.

Anticipation for the next iPhone is global. Alok Jain, 34, a software developer in Bangalore, India, said he’s waiting for the next model and has encouraged several friends to hold off as well.

“There have been a couple of instances in the past few months when friends came up to me and said, ‘This 4S looks appealing,’” Jain said. “And my advice was, ‘Wait until the iPhone 5.’”

To contact the reporter on this story: Adam Satariano in San Francisco at asatariano1@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net


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Companies Mentioned

  • AAPL
    (Apple Inc)
    • $100.96 USD
    • -0.83
    • -0.82%
  • VZ
    (Verizon Communications Inc)
    • $50.35 USD
    • 0.66
    • 1.31%
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