Will Apple Disappoint This Quarter?

Money Cut in HalfShares of Apple (NASDAQ:AAPL) traded as low as $452.14 on Wednesday afternoon — a dip of $9 or 1.95 percent — pushed down by Pacific Crest analyst Andy Hargreaves’s warning that the company will most likely miss expectations for the current quarter when it reports results in April and disappoint with its guidance for the June-quarter. In his research note, seen by Barron’s, he reiterated a Sector Perform rating on the company’s shares.

The reason for his pessimism was largely a result of a lower outlook for the iPad.

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Hargreaves cut his second fiscal quarter forecast to $41.1 billion and $9.60 per share in net profit from a prior $41.8 billion and $9.89 per share. The average estimate for the company’s current quarter is slightly higher, at $42.77 billion and $10.14 per share. The analyst also took an ax to his fourth quarter expectations, cutting his estimate to $33.5 billion and $7.16 per share from a prior $37.1 billion and $8.32 per share. Once again his forecast is below the average consensus for $39.78 billion and $9.41 per share.

As for many Apple analysts, lowered sales expectations for the iPhone contributed to his assessment. Hargreaves dropped his second-quarter number to 36.9 million units from 37.3 million, a decision that “largely related to the product cycle, which we consider to be a transitory issue.” However, he did add that his firm believes “sell-through evidence supports our view that the high end of the smartphone market is quickly becoming saturated.”

But he is most worried about iPad sales figures. “We consider the reduction to our large-format iPad estimates to be the most significant, as this appears likely to be a sustained trend as tablet demand shifts to smaller and less expensive models,” wrote Hargreaves. He lowered his number of expected sales to 16.5 million units for the second quarter from a prior estimate for 17 million. His third quarter figure was cut to 15 million from 18.5 million because the firm anticipates “soft demand for large-format iPads and a demand pause in front of a likely fiscal Q4 product refresh.”

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“We expect a Retina iPad Mini in FQ4,” wrote Hargreaves, “but we do not know if it will replace the existing iPad Mini at the same price points, or if Apple will keep the iPad Mini as an entry-level product and replace the iPad 2.”

The Pacific Crest analyst also weighed in on the circulating rumors predicting the release of a lower-priced iPhone, writing that he has not discovered any evidence of component orders for such a device. That fact is “somewhat unusual this close to the anticipated launch,” Hargreaves noted.

But if Apple does release a low-cost version of the iPhone, Hargreaves has a clear idea of how the company should approach the device. “In addition to the lack of clear component orders for a ‘low-cost’ iPhone, it remains unclear whether the ‘low-cost’ device is intended to open up the sub-$300 market, or if it is intended to expand share of the $300-plus market through a broader assortment of more fashion-oriented products,” he wrote. “We believe Apple would maximize its long-term profit potential by continuing to focus on dominating the $300-plus market segment rather than moving significantly downstream.”

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