iPhone disappointment bites Apple

To mild disappointment from analysts and investors, Apple (NASDAQ: AAPL) launched two new smartphones last week - the colourful, plastic-backed iPhone 5c and the ultra-fast, top-of-the-line iPhone 5s. Indeed, perhaps mild disappointment understates the situation - Apple's shares slumped 6 per cent following the announcement, something unprecedented immediately after a new iPhone launch.

The technical specifications of the phones aren't actually the problem. As widely expected, the 5c and 5s represent two evolutionary, but not revolutionary, iterations of the massively popular iPhone. A future generation 64-bit processor and a new digital fingerprint scanner in the 5S should also keep sales ticking over nicely.

The downside surprise, however, was the price. The 5c had been tipped as a significantly cheaper alternative that would allow Apple to better compete in the mid-range smartphone market aimed at emerging markets. However, it's only priced at $100 (£65) less than the 5s, meaning it is still very much a high-end smartphone. Moreover, Apple kept silent about a potential partnership deal with China Mobile, the country's largest mobile operator - it had been hoped that a deal would be in place by the launch.

UBS says…

Neutral. We downgrade from buy to neutral on the concern that Apple's pricing strategy will hamper the company's ability to be competitive in key growth areas in the smartphone market - particularly in China. Even if Apple secures a partnership deal with China Mobile, it will be challenged to compete against Android devices with similar specifications at half the price. A recent survey of 35,000 Chinese consumers indicated that only 2.6 per cent of respondents would consider purchasing the iPhone 5c at its current price. We therefore lower our unit sales forecasts on weaker demand and lower our price target from $560 to $520.

Barclays says…

Overweight. While unit sales may lack some upside, the new iPhones make up for it by protecting margins. We believe calls for increased share repurchases may now grow as cash flow prospects look strong - potentially adding several dollars to earnings per share (EPS). We also note that next year looks as though it could have a more potent new product cycle with a possible iPhone 6, with a larger screen, a possible TV and even potentially new iPad/convertible products. We still believe Apple plans a launch with China Mobile before the year-end, which will give it access to more than 700m mobile subscribers. Expect full-year EPS of $39, rising to $40.8 in 2014 (from $44.14 in 2012).