Apple shares dip 7.5% on signs of slowing iPhone growth

J.P. Morgan cuts targets for Apple stock to $585 from $615

Apple shares were down 7.5% to $509 in pre-market trading Tuesday morning after confirming investors’ worst fears: iPhone growth is slowing. The company sold 51 million iPhones, but analysts were expecting Apple to sell 55.3 million iPhones.

J.P. Morgan’s Mark Moskowitz has reduced his target price for Apple to $585 from $615.

“We think the iPhone air pockets reflect broader slowing in the smartphone market and company-specific factors. Apple is preparing for a few more quarters of turbulence in developed markets (North America) due to upgrade policy changes. Plus, Apple signaled the China Mobile roll-out will be limited by 4G-readiness,” wrote Moskowitz in a research note.

Walter Piecyk of BTIG is not downgrading the stock (yet), but warns that Apple needs to put out a new product in order to dig itself out of its six-quarter run of declining growth.

“When we upgraded the stock in March, we assumed Apple could announce a new product that would generate $5 billion of revenue in Fiscal 2014.  That new product never materialized.  We can’t say we are not concerned,” Piecyk wrote in a blog post. “When Apple announced the new Mac Pro at WWDC in June, Phil Schiller proudly boasted, ‘Can’t innovate, my ass’. If that is what the company considers to be innovative then there should be some concern for EPS growth.”

Piecyk’s prescription: Apple needs to “remain focused on developing products that change people’s lives, not just iterate a new version of an existing concept.”

December quarter net profit came in at $13.1 billion or $14.50 per share on revenue of $57.6 billion. Analysts were expecting an EPS of $14.09 on $57.5 billion in revenue.

While iPhone sales were disappointing, iPads got a big boost last quarter with Apple selling 26 million units—also an all-time quarterly record. That’s up from 22.9 million iPads sold in Q1 2013. And Mac sales saw a bump of 19% as Apple sold 4.8 million units, up from 4.1 million last year.  

Some other interesting tidbits for the quarter: over seven million iPads have been purchased by U.S. educational institutions, and some 7,000 iPads are being distributed to students in the Midway Independent School District. More than 750,000 iPads have been purchased for K-12 students in Texas alone.

IPads now account for 78% of tablet traffic while iPhones account for 54% of smartphone Web traffic. Additionally, iPhones now account for 59% of the U.S. commercial smartphone market.

Also revealed in the call: almost very NFL team now uses an iPad for their playbook instead of the traditional three-ring binder (something to look for at the Super Bowl this weekend).

Additionally, 80% of iOS devices are now running iOS 7, making it the most popular operating system in the world. Meanwhile, iPod sales declined a whopping 52% in the fourth quarter, but what’s new?

As for the iPhone 5C, Tim Cook cautiously admitted that demand for the new “low-cost” iPhone was “different than we thought.” Indeeeeed.

But, Apple’s big China Mobile deal will make up for that in spades. While the deal was signed after the holidays and the number of iPhone purchases and activations is not included in the fourth quarter earnings, the company did say that last week was the best week for iPhone activations Apple has ever had in China to date.

And iTunes saw record billings last quarter, coming in at $4.7 billion. Over 130,000 apps have been developed in China thus far.

The company is setting its second quarter guidance at $42-$44 billion in revenue with gross margins of 37-38%.