Wells Fargo: Carriers Now Control iPhone Sales

Apple reported record revenue during its first fiscal quarter for 2014 and 51 million iPhones sold, but Wells Fargo analyst Maynard Um is saying demand for the company's smartphone is light since he was expecting 54.8 million units sold. The reason behind lower than expected iPhone sales was lighter demand driven in part by cell service providers getting strict about 24 month smartphone upgrade cycles.

Carriers taking control from Apple means lower iPhone sales are comingCarriers taking control from Apple means lower iPhone sales are coming

"iPhone units implied from revenue guidance is roughly 5 million below our prior estimate, leaving questions about end demand since there were no supply issues," Mr. Um said. "Operators becoming more strict to 24 month upgrade cycles may reflect more signs of the balance of power shift back to operators."

He added, "[Apple's] commentary that operators in the US changed upgrade policies to be stricter to the 24 month period reinforces our view that there are signs the balance of power may be starting to shift back to operators."

Along with 51 million iPhones sold during the first fiscal quarter, Apple reported US$57.6 billion in revenue with $13.1 billion in profits. The company sold 26 million iPads, and 4.8 million Macs.

iPhone sales were up year over year, as were iPad and Mac sales.

Second quarter guidance came in below Wall Street expectation of $46.1 billion in revenue, and Mr. Um's agressive $46.9 billion. Apple said it expects to bring in between $42 billion and $44 billion. Apple is projecting second quarter gross margins between 37 percent and 38 percent, which is in line with Mr. Um's 38.2 percent estimate and Wall Street's 37.3 percent.

While he expects Apple's iBeacon technology to grown in 2014, for the iPhone 6 and rumored iWatch to hit store shelves, and for the ongoing stock buyback program to help boost the company's value, Mr. Um sees some downside this year. Gross margins will take a hit when the iPhone 6 launches later this year, plus market cap opportunities are limited in some of the company's market segments, and the shift of power from Apple to cell service providers will hamper iPhone sales.

Mr. Um is maintaining his "Market Perform" rating for Apple's stock, but lowering his 12 month valuation from $536 to $581 down to $505 to $575. Apple is currently trading in the pre-market at $510.70, down 39.80 (7.23%) after closing on Monday at $550.50.

[Some image elements courtesy Shutterstock]