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Apple (Nasdaq: AAPL) shares closed at US$248.63 at press time Tuesday, up $1.69 from Friday. While they had sporadically hovered around or even fallen below the $248 mark occasionally in May and June, you'd have to go back to April to see them remain regularly below the $250 mark.
What happened? Why the price drop, when the iPad and the iPhone 4 are selling like hotcakes? Recall that Apple shares were climbing in recent weeks, even when the overall market was trending downwards.
Has the magic worn off the iPad and iPhone 4? Did someone put a hex on Apple? What's making investors nervous?
Abracadabra and Alakazam!
Right now, supply problems are reportedly hampering iPhone 4 sales, and Shaw Wu, an analyst at Kaufman Brothers, has warned that Apple won't move as many units of this device as previously expected in this quarter.
While Wu had previously pegged sales at 9 million units, he now believes Apple will only sell 7.5 million iPhone 4s this June quarter.
Perhaps that's worrying investors. However, Cupertino will probably make up for this in the September quarter, by which time the company should have its supply wrinkles ironed out.
"There could be a decline in this June quarter due to supply issues and product transition -- the old 3GS has gone, and the new low-end iPhone coming onstream to replace the 8 GB 3G iPhone," Brian Marshall, an analyst at Gleacher, told MacNewsWorld.
"However, I'm not too worried about the June quarter," Marshall said. "Apple will beat the street's current expectations anyway, and build plans are quite large for the September quarter."
A little patience is a wonderful thing for investors to have, it seems.
Will Manufacturing Be a Money Pit?
Meanwhile, wages are rising in China, where most of Apple's devices are made. This is due to a combination of factors -- a shortage of skilled workers, increasing worker unrest over the low wages many factories pay, the strengthening of China's Yuan, and the rising cost of housing.
That means devices made in China, from mobile phones to laptops, will cost more.
Apple won't be hit too hard, Gleacher's Marshall contends.
"I estimate the cost of manufacturing the iPhone 4 is less than 10 percent of the total bill of materials cost," Marshall pointed out. "If labor costs double, perhaps this might add a couple of percentage points to the total costs, but at the end of the day, it's not that big a deal."
Keep the Customer Satisfied
Other problems related to the iPhone 4 may trouble Apple more. For one thing, complaints about the iPhone 4's wireless reception, and Apple's handling of the situation, has become a public relations nightmare for the company.
Recall that users have long blamed AT&T (NYSE: T) for poor reception on their iPhones; then, when the iPhone 4 hit the streets, Apple gave various explanations for poor reception on the device in response to complaints. Last week, Apple said it had been using an incorrect algorithm to relate signal strength to the number of bars that appear on the iPhone's display, and that the problem went back all the way to the first iPhone.
Some users aren't buying that explanation. Apple's now facing several lawsuits seeking class-action status.
The lawsuits themselves are not likely to present Apple serious legal difficulties, argues Jeremy Mishkin, a partner at Montgomery McCracken, Walker & Rhoads, and chair of the legal firm's litigation department.
However, they could be a public relations crisis for Apple, Mishkin told MacNewsWorld.
"It's bad for Apple's marketing and brand because the lawsuits highlight what appears to be a real problem in a product that had, until now, an incredibly successful launch," Mishkin said.
If third-party reports suggesting the iPhone 4's reception problems are due to reasons other than faulty software as Apple has claimed, the company could be digging itself into a deeper hole by trying to avoid responsibility, Mishkin said. That will give the lawsuits against it more legs, he warned.
"Now that Apple has got products that are dominant in their markets, Apple's behavior is subject to much more intense legal scrutiny, and viewed much more skeptically, than back when it was the struggling little guy trying to stay in business," Mishkin explained.
Stirring Up the Lawmakers
The class-action lawsuits may have other ramifications that may be even more troubling to Apple -- they may trigger investigations by the federal government.
"If it turns out that Apple has covered up a defect in its product, that not only makes the civil cases more expensive for Apple to resolve, but also increases the likelihood that governmental investigations will follow," Mishkin warned.
"So far, there's no concrete proof," Mishkin said. "Could this be another case of 'It's not the initial mistake that gets you -- it's the cover-up afterwards?' Time will tell."
Apple is already facing the possibility of a probe by either the Federal Trade Commission or the Justice Department over its moves in the mobile ad market. Further, Representatives Edward Markey and Joe Barton have asked Apple chairman and CEO Steve Jobs to explain changes in its privacy policy for its location-based services.
Yet another probe cannot be good for Cupertino in the short run. Still, as long as Apple resolves its supply and iPhone 4 reception problems and focuses on overseas markets, it is likely to weather this storm.
