updated 09:00 pm EST, Fri December 14, 2012
Lack of lines in stores seen as weaker demand
Moves by Apple to control crowds at Chinese stores (due to concerns of violence and scalpers) and an increase in the number of points of sale, as well as a stronger online and in-store reservation system may be fooling some analysts into thinking that the iPhone 5 is seeing weaker demand than forecast. Analysts from UBS and Jeffries cut their estimates on iPhone sales on Friday, sending the stock plummeting four percent to close at $509.79, a ten-month low. The lack of long line-ups that had been seen with previous iPhone launches may be making investors nervous.
The lack of lines -- as well as the relatively weaker in-store demand for the iPhone 5 -- is easily explained, however. Following violence outside its Shanghai stores last year due to quick sellouts of the iPhone 4S, the company switched to a reservation system and tight limits on how many iPhones a person could buy -- preventing "mules" from buying quantities and re-selling them in other countries. Apple also dramatically increased the number of "points of sale" carrying the iPhone 5, and let carriers spend weeks collecting pre-orders.
In addition to some 300,000 pre-orders for the iPhone 5 taken by China Unicom, the country's second-largest carrier, other reports mentioned some 200,000 units of the iPhone 4S were sold through third-place China Telecom as well, reflecting healthy interest in the lower-cost options provided by Apple. The main barrier to the iPhone 5's success in China would seem to be that various regulatory hurdles kept it out of retail until nearly mid-December, meaning it will be April before it is known exactly the impact of the iPhone 5 in China, as its debut comes too late to make a strong impression in overall iPhone sales for Apple's fiscal Q1, even though some analysts believe the company will sell a few million units in China by the end of the year.
Whether the iPhone is an immediate hit or not may impact the stock price short-term, but Apple is widely expected to have another record holiday quarter this year overall, with a strong and mostly-refreshed lineup of products including recently-updated iPods and iPod Touch units, the iPad Mini (which is on track to outsell the also-updated fourth-generation iPad), the Apple TV (which received a minor software update in late November and has given hints that it may soon be updated to allow iOS apps to run), and a strong lineup of Mac products, including the limited-supply new iMacs.
The iPhone 5 does still face some challenges in China, including some issues with Apple's Maps application that still lags behind the rapidly-improving US and European versions, a more limited version of Siri, a high up-front cost in the country and the ongoing lack of a deal with China Mobile, the world's largest carrier. The latter problem is expected to be resolved at some point early next year, and December is not an exceptional sales month in China the way it is in the west, but its absence on that network continues to give competitors a leg up.
Apple's stock has been on a general downward slide for three months now, fostered by profit-taking ahead of expected capital-gains tax increases in the new year. Even a number of Apple executives have cashed in large amounts of stock in order to avoid the possibility of increased taxes on such income.
The change in capital-gains taxes mostly affects high-income investors, but is a noticeable jump from the current (and historically low) 15 percent rate (investors who are in tax brackets lower than the top two will see long-term capital gains increase from the current zero level to 10 percent). While Congress may make some changes to the increase, currently it will move to 25 percent for the top two tax brackets on long-term gains (stocks held for more than one year). Short-term gains rates will not substantially change.
Some analysts are sticking with their prediction that the stock will bounce back after the holidays. Piper Jaffray technology analyst Gene Munster is holding to rating and predicting that 45 million iPhones will be sold this quarter, with about one tenth of that number coming from China.