With Apple Stock at the iPhone's Mercy, Time to Play Defense

We hear one tidbit of bad news about Apple Inc. (Nasdaq: AAPL) cutting orders for iPhone 5 components and – boom! – Apple stock drops more than 6%.

The reason for the stark cause-and-effect on Apple stock is that the iPhone contributes about 53% of Apple's vast revenue. [In fact, were the iPhone a standalone company, it would rank 29th in the Fortune 500.]

This latest Apple bombshell broke late Sunday.

According to reports from Nikkei and The Wall Street Journal, Apple supposedly cut orders for several key iPhone 5 parts for the first quarter. The Cupertino, CA company's orders for iPhone 5 screens, in particular, were reportedly slashed in half.

That was immediately interpreted as a response to lower-than-anticipated iPhone 5 sales, which in turn raised alarms that Apple could be headed for more earnings disappointments, hence the selloff.

Apple followers have questioned the validity of the story. Some bloggers pointed out that the number of iPhone 5 screens that Nikkei said Apple ordered had to be false in that it was far beyond any realistic estimate of iPhone sales for the current quarter.

But whether there's anything to the report or not, its impact on Apple stock has been real.

In the immediate wake of the story, several analysts cut their ratings and price targets. In less than two trading days, AAPL has lost $30 billion of market capitalization – the equivalent of Lockheed Martin Corp.'s (NYSE: LMT) entire market cap.

Apple is now paying the price for having one of the most profitable consumer products in history.

iPhone Becomes Vulnerability for Apple Stock

On the way up, the iPhone made Apple the most valuable company on the planet.

But now that iPhone sales growth seems to be leveling off, the overdependence that such success created has become vulnerability, at least as far as Apple stock is concerned.

Make no mistake – the iPhone remains popular, but it no longer dominates the smartphone market as it did in its first several years.

According to IDC, Apple's global share of the smartphone market slipped from 23% in the last quarter of 2011 and the first quarter of 2012 to just 14.6% in the third quarter.

Meanwhile, market share for Samsung Electronics (SSNLF), Apple's chief rival in the smartphone market, has shot up from 8.8% in the third quarter of 2010 to 31.3% in the third quarter of 2012.

Research firm Strategy Analytics predicts that Samsung, which dominates the market for phones that use Google Inc.'s (Nasdaq: GOOG) Android operating system, will increase its lead over Apple by about one-third in 2013 by selling 290 million smartphones compared with Apple's 180 million.

Unless Apple has some answers up its sleeve for 2013, stagnant – or even just moderate growth in iPhone sales – will remain a drag on Apple stock.

What AAPL Might Do to Beef Up iPhone Sales

Apple is not without options regarding ways to invigorate iPhone sales. Some recent rumors and news reports point to some of these possibilities:

• The "Cheap" iPhone: Several recent reports claim Apple has been working on a low-cost version of the iPhone that would retail for $99 to $149. Some dismissed the reports after Apple marketing chief Phil Schiller said that a "cheap" iPhone would "never be the future of Apple products." The reality may be that Apple is indeed working on a phone that it can sell for less, but one that maintains minimum standards of quality. Such a "budget iPhone," which might lack a Retina display and use older camera technology to cut costs, would be affordable to millions more customers, especially those in developing countries with the fastest-growing markets like India and China.
• Quicker Product Cycles: Apple surprised observers with the iPad 4 last fall, just six months after the iPad 3 debuted. But refreshing its products twice a year, instead of just once a year, would help maintain sales throughout the year. With competitors like Samsung coming out with new products all year long, a six-month-old iPhone model looks stale by comparison, and sales numbers show at least some potential iPhone buyers have opted for newer Android models. Will Apple do it? Many suspect that Apple is indeed planning an "iPhone 5s" update for the May-June period.
• China Mobile Deal: Apple's prospects in China have been held back by lack of access to China Mobile's 700 million subscribers, the most of any carrier in the world. But that could change in 2013 as Apple CEO Tim Cook traveled to China just last week to meet with his China Mobile counterpart. Such a deal, combined with a budget iPhone offering, could spark a huge increase in iPhone sales.
• Cutting-Edge Technology: Let's face it, the overwhelming lead that the original iPhone had over the competition is mostly gone. Rival phones have caught up in most areas, and in a few surpassed the iPhone. It's hard to charge Apple's premium prices for products essentially comparable to what the other guys are selling. Apple needs a new unique killer feature for the iPhone, if not in the spring, then for the fall.

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