Apple's higher standard: How 51M iPhones is somehow disappointing

The Cupertino, Calif., electronics giant had its best quarter ever for smartphone and tablet sales, but Wall Street's unhappy. CNET breaks down why.

Hundreds of people await the iPhone 5S and 5C launch in September at Apple's Fifth Avenue store in Manhattan. Sarah Tew/CNET
Only Apple could post record smartphone and tablet sales and still leave investors grumpy.

But that's exactly what happened late Monday, when the Cupertino, Calif., company reported selling 51 million iPhones and 26 million iPads. Champagne time, right? Well, Wall Street wasn't in the mood, as it was looking for sales of 55 million iPhones and a rosier revenue forecast for the current quarter.

Shares dropped 7.6 percent to $508.60 in recent trading Tuesday, after falling as much as 8 percent late Monday.

Call it a consequence of the Apple halo effect, expectations that are set improbably high because of its track record of slick, highly coveted products, and Wall Street's need to see the next blockbuster around the corner. One analyst even asked CEO Tim Cook if he still considered Apple a growth company (Cook, for his part, said that he's very confident of year-over-year growth and that underlying results are better than they appear).

It may seem downright silly to punish Apple following a quarter when it sold more smartphones than every rival (besides Samsung) did during all of 2013. But Wall Street isn't looking at what happened last quarter; that's old news. It's more concerned about what could happen this quarter and the next and the next. And it's afraid that Apple might have lost its mojo.

It has been several years -- since the first iPad in 2010, in fact -- since Apple has defined a new product category. It's believed to be working on a wearable device and a new TV product, as well as offerings such as mobile payments, but so far, those are just rumors. Analysts have to take Apple's word that it has "great things" in store for later this year -- a refrain they've heard many times over the past few years -- but that's becoming harder for some to do.

"The big question is: Are analysts right to be so pessimistic, or should they trust that Apple ... will launch a new product this year to get growth going again?" Jackdaw Research chief analyst Jan Dawson said. "At this point, it's a matter of faith."

Until those great new things emerge, analysts have to rely on iPhone and iPad sales to bolster their confidence. Unfortunately for Apple, blockbuster phone and tablet sales are no longer enough, and days of such high growth rate may be behind not only Apple but the entire high-end smartphone market.

In developed markets like the US, almost everyone who wants a smartphone has one. And the tablet market is maturing as well. That means Apple, Samsung, and all others in the mobile industry have to look to emerging regions like China for growth. Apple now has a bigger presence in that country with its China Mobile partnership, but it could take some time for sales to really take off on the world's biggest network with three-quarters of a billion subscribers.

Cook said late Monday that the iPhone on China Mobile only works in the 16 cities that have 4G. The carrier plans to expand 4G to more than 300 cities by the end of the year, but iPhone sales on that network could be sluggish for a while. Analysts had been counting on China Mobile subscribers to buy about 15 million to 30 million iPhones this year.

Even though Apple is focusing on emerging markets, it doesn't really make smartphones that average consumers in those regions can afford. The company positioned the iPhone 5C as more of a mainstream product, but it's still too pricey for developing countries. And it turns out that most people are buying the higher-end iPhone 5S that includes a fingerprint sensor.

"People are really intrigued with Touch ID," Cook said. "I think that, associated with the other things that are unique to the 5S, got the 5S to have a significant amount more attention and a higher mix of sales."

Because Apple has nailed it so many times with new products -- the iPad Mini, devices with higher resolution screens -- it's a little unsettling when it gets it wrong, as it did in the case of the iPhone 5C. Rumors already have popped up that Apple may dump the phone, though Cook and Chief Financial Officer Peter Oppenheimer largely dodged questions about the device late Monday.

That Wall Street is selling off Apple shares today is not a sign of doom and gloom for the company. By any measure, Apple is still an extremely healthy company with strong prospects for the future. Analysts haven't "lost their faith," and many are still waiting on the next iPhone to provide another catalyst.

"We would be buyers on the pullback based on our belief that despite the disappointing Dec-13 report, particularly on iPhone, the concept of owning [Apple shares] into the fall for the iPhone 6/new product cycle that is widely expected remains," Piper Jaffray analyst Gene Munster noted.

The company is expected to launch new iPhones with bigger screens later this year, which could shore up its position against the wave of larger, high-profile Android smartphones in the market, as well as get Apple into the so-called phablet category of jumbo phones, one pioneered by Samsung and its Galaxy Note franchise.

By then, analysts will rejoice, reviewers will lavish praise on the phones, and all will be well in Apple land again. At least until the next time Apple misses the next set of lofty expectations.

 

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