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Weak iPhone Forecast Proves Apple Inc. Isn't Recession-Proof

The economic slowdown has finally trickled up to Apple's gadget-buying faithful

by Elizabeth Harrow (eharrow@sir-inc.com) 11/3/2008 1:40 PM

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Analysts at Friedman Billings Ramsey & Co. (FBR) have revised their estimate for iPhone production in the fourth quarter, and the results aren't pretty. Previously, FBR estimated that Apple Inc. (AAPL: sentiment, chart, options) would experience a sequential 10% drop in smartphone production during the quarter. Today, the brokerage firm said that its most recent checks indicate a significantly sharper 40% plunge could be in the cards.

In a note to clients, FBR noted that a number of iPhone-parts suppliers could also be impacted. Marvell Technologies (MRVL) could lose $10 million in revenue, Broadcom (BRCM) could sacrifice $12 million in sales, and Linear Technology (LLTC) could be looking at a $5-million revenue shortfall.

Friedman said that slipping iPhone production "suggests that the global macroeconomic weakness is impacting even high-end consumers, those that are more likely to buy Apple's expensive gadgets." The firm added, "No market segment will be spared in this global downturn."

In afternoon trading, AAPL is more than 1% higher despite FBR's warning of iPhone weakness. The tech-sector heavyweight has recently kept pace with action in the broader U.S. equities market, which could explain today's mild gains.

However, Apple shares are facing a serious technical hurdle on the charts, which could limit potential upside. Round-number resistance from the 110 level looms directly overhead; the stock hasn't surmounted this region on a weekly closing basis since late September. In the weeks since, this level has acted as a ceiling for all of the equity's rally attempts. As the stock's 10-week moving average descends into the region, resistance here will likely be augmented.

Weekly Chart of AAPL since July 2006 With 10-Week Moving Average

In fact, AAPL spent the entire month of October bouncing between the 90 and 110 levels. A rejection at the upper end of this trading range could send the shares dropping back into double-digit territory.

Meanwhile, the significance of the 110 strike hasn't been lost on option traders. The stock's November 110 call has 21,789 contracts in residence, and another 14,112 contracts have crossed the tape at this strike so far today. This call is by far the most popular AAPL option today, and the heavy attention being paid to this strike indicates that many investors are expecting the shares to climb back atop this level by the end of the month.

Overall, the market's indifferent reaction to the drastically slashed iPhone production figures is troubling. It seems clear by now that Apple is not immune to the economic downturn, and today's note from FBR only serves to reinforce that point. With fundamental and technical challenges looming on the horizon -- and investors maintaining a stubbornly upbeat stance -- it looks like AAPL may continue to struggle in the short term.

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Weak iPhone Forecast Proves Apple Inc. Isn't Recession-Proof

The economic slowdown has finally trickled up to Apple's gadget-buying faithful

by Elizabeth Harrow (eharrow@sir-inc.com) 11/3/2008 1:40 PM

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