Apple Down On Concerns Over Margins, Droid X

By Rex Crum Shares of Apple Inc. (AAPL) fell to their lowest point in almost two months as analysts expressed concerns about the company's profit margins one day ahead of the release of Apple's quarterly results. Another potential factor in Monday's drop could be the strong sales over the weekend of the Droid X, the latest Android-powered smartphone that may give the iPhone 4 some fresh competition at a time Apple is in a PR battle over what some claim to be design flaws with its latest device. By midafternoon, Apple shares were off more than 3.5% to $241.12 after earlier falling below $240 for the first time since May 25. The pullback came a day before Apple's third-quarter earnings report, in which analysts surveyed by Thomson Reuters estimate Apple will earn $3.11 a share, up from $1.35 a share in the same period a year ago. Revenue is forecast to rise 77% to $14.7 billion. The sell-off also took place barely three days after Apple Chief Executive Officer Steve Jobs gave a press conference to discuss issues regarding the widely reported reception troubles of the iPhone 4. On Friday, Jobs struck a largely defensive tone about the device, saying it has affected a tiny minority of iPhone 4 buyers. But he offered an apology to customers who felt let down by the device. "Whether Antenna-Gate is fully closed and will have no residual impact on Apple remains to be seen," wrote Toni Sacconaghi of Bernstein Research in a note to clients Monday morning. Brian Marshall of Gleacher & Co. said in an email interview Monday the sell-off was likely from a combination of factors, including worries about margins and "Droid Mania," with reports of the Droid X selling out over its opening weekend. Margin concerns Even analysts that are upbeat about Apple expressed some concern that the company's gross margins as a percentage of revenue could prove disappointing. Stifel Nicolas analyst Doug Reid said Monday that "evidence of ongoing component shortages," as well as declines in the average selling prices of Apple's products led him to estimate Apple's margins will come in at 38.8%, while the consensus outlook it for 39.5%. In a research note, Reid said "even a slight disappointment" in gross margins would likely dominate over Apple's revenue growth and put some pressures on the company's stock in the near term. Reid holds a buy rating and $340-a-share price target on Apple's stock. With the iPhone 4 gaining so much attention in the quarter--Jobs said the company has sold more than 3 million of the smartphones since they went on sale June 24--Rodman & Renshaw analyst Ashok Kumar said timing issues with the product are likely at the heart of any problem with Apple's profit margins. Kumar cut his forecast for iPhone sales in the quarter to 8 million units from 9 million due to supply constraints and the iPhone 4 arriving so late in the quarter. Kumar said the timing of the iPhone 4's release was such that supplies sold out too quickly to make up for declining sales of older iPhone models. Droid X hits the market But the overriding issue with the iPhone 4 is likely to be whether or not the company experiences any long-term negativity from the "Antennagate" matter that left some consumers complaining about poor reception and dropped calls with the smartphone. On Friday, Jobs and Apple sought to put the matter behind them by apologizing and offering iPhone 4 buyers free phone cases that are supposed to help with the phone's reception. During a press conference, Jobs took some shots at competing products, such as Research In Motion Ltd.'s (RIMM) BlackBerry phones, saying that problems with smartphone antennas are an industry-wide matter. Both RIM and Nokia Corp. (NOK) issued statements refuting Jobs claims. Sacconaghi said Monday that "Antennagate" may continue to affect the company, including its outlook for future reporting periods. "The immediate-term question for Apple and investors is whether the company may be incrementally more cautious," with its revenue and earnings-per-share forecasts in the wake of the iPhone 4 situations, Sacconaghi wrote. Sacconaghi said and even bigger matter for Apple is "the emerging pattern of hubris that company has displayed," which has pitted rivals against the company and could end up alienating potential customers and shareholders. A sign of the growing competition against Apple could be found in last Friday's release of the Droid X, Motorola Inc's (MOT) sequel to the best-selling Droid smartphone that runs on Google Inc.'s (GOOG) Android operating system. The Droid X debuted exclusively in the U.S. at Verizon Wireless outlets amid reports of long lines and product sellouts. (Verizon Wireless is a joint venture of Verizon Communications Inc. (VZ) and Vodafone Group PLC (VOD, VOD.LN). Gleacher & Co. analyst Mark McKechnie said Monday an informal survey of 20 Verizon dealers found the Droid X sold out or nearly sold out at all locations. -By Rex Crum, 415-439-6400; AskNewswires@dowjones.com (END) Dow Jones Newswires July 19, 2010 13:55 ET (17:55 GMT)