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Wednesday, Jul 17, 2013 7:30pm
Apple may beat consensus on iPhones, see slow growth on iPads
Apple's fiscal third-quarter results will be revealed on July 23, but analysis consensus estimates are already in from Wall Street and independent analysts, and as usual predictions vary widely. However, the averages reveal that across the spectrum analysts predict modest growth for Apple's two most popular products, with an opportunity for the company to beat consensus estimates. A group of 48 analysts both traditional and independent surveyed by Fortune believe Apple will sell 27 million iPhones and 18 million iPads.

If those estimates turn out to be accurate, expect AAPL stock to take a beating even though they would represent modest growth from the year-ago quarter (4.3 percent and 6.2 percent respectively). The reason is that despite selling more units, the rate of growth -- particularly on iPads -- will be far less than the growth rate last year (about 28 percent and 113 percent respectively).

The adjustment made last year to bring out iPhone and iPad models at about the same time -- just ahead of the holiday buying season -- means that Apple's fiscal Q3 and Q4 now suffer from not having any fresh models of the two most popular products. Though Apple may well release updated Mac products before the end of the current quarter, it announced its most recent product refresh -- the Haswell-equipped MacBook Air -- near the end of fiscal Q3, meaning its sales will have minimal impact on Apple's numbers. With no "blockbuster" products on tap until near the end of Q4, sales will continue to dip over the summer as consumers wait for new or refreshed models.

Instead, the company must rely on expansion of its current product line to drive growth. The iPhone 5 continues to do remarkably well in North America, particularly for a nine-month-old model -- even stealing share away from more recent competitors like the Samsung Galaxy S4. However, in some other parts of the world the news isn't as rosy: all three major Russian carriers recently dropped the iPhone, citing high subsidies that were unsupportable in its economy. Rumors have the iPhone doing less well in Europe as well.

Nevertheless, at least one analyst believes that the iPhone line -- bolstered by surprising strength of the iPhone 4S and 4 in both North America and developing markets -- could beat analyst expectations even if the company hits financial targets. Morgan Stanley's Katy Huberty told investors that her sources believe Apple may have sold between 29 and 32 million units, and that its possible this could push revenue up above $36 billion, beating the consensus of $35.1 billion, AppleInsider reports.

As for iPads, the company again may be able to beat analysts' estimates. The consensus of 18.1 million iPads still represents 6.2 percent growth year-over-year, but most independent analysts -- who have traditionally been more accurate than Wall Street in their predictions -- feel the number could be somewhat higher. Taking their figures alone, the estimate jumps to 20 million units. Sadly, even if Apple were to do as well as the most optimistic predictions of 22 million iPads, it would still be seen as a "saturation" of the market barring a new model, since growth rates would still be well below last year's 28 percent.

Despite the fact that new models and other products coming in the fall timeframe practically guarantee another record holiday season for the company, analysts are impatient for products that will stimulate sales. They worry that even with an assured forthcoming record quarter, competition worldwide may continue to eat at Apple's dominance of its two most key markets, smartphones and tablets -- further eroding sales in quarters when new models aren't announced.

The company has felt pressure on the smartphone front primarily from cheaper models, prompting wide speculation that Apple may produce a less-expensive version of the iPhone. In tablets, however, a serious threat has yet to materialize even more than three years after the original iPad was introduced, and sales of the iPad mini may be the key to any gain on analyst estimates Apple could produce.

One important area where Apple will hope to beat estimates is in overall revenue. Wall Street is expecting nearly flat growth or revenue year-over-year, thanks to some discounting of iPhones in developing markets and a lower profit margin on the iPhone 5 and iPad mini. However, profits from the iTunes stores -- which are said to be growing at an impressive rate -- may offset lower hardware profits and even push Apple slightly upwards on revenue growth.