Apple shares slide amid iPhone worries

(MoneyWatch) Apple (AAPL) shares continues to lose altitude, dipping another 2.5 percent Tuesday after falling this week to under $500, from about $520, and from a high earlier in the year of more than $700.

Triggering the slide was a report by the Wall Street Journal on Sunday that said Apple had cut its iPhone 5 parts order by as much as half. Investors who realize how much of the company's fortunes are build on its handset sales have reacted quickly, discounting the stock price in advance of the company's earnings announcement on January 23.

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The problem for Apple is that the iPhone offers by far the highest margin -- money left from the selling price after the cost of making an item -- of any of its product lines, including the iPad. Any drop in iPhone sales would have an outsized impact on overall company profits.

Even if there wasn't a drop in sales from the previous quarter, iPhone unit sales might not grow by the large jumps investors have come to expect, especially after the introduction of a new model. The iPhone 5 launched last September, and so should have combined with the traditional increase in holiday sales to provide Apple a major boost.

There are some indications that Apple could have intentionally, if unofficially, leaked information to reset expectations before the earnings report. Investors tend to react badly to surprises. But even leaking the information will have a limited effect unless the quarter's results are significantly better than what people are now expecting.

Some analysts are trying to allay fears about Apple's short-term prospects, offering the alternative explanation that lower component orders could have to do with improved product yields. That is a measure of how many units made in manufacturing are in good enough shape to sell.

The iPhone has seen manufacturing problems including scuffed and scratched devices before they are put on store shelves. Dealing with such issues affects product yields because fewer of the unit can be sold, meaning that the company needs to make more devices.

But yield is usually measured at the factory, not after shipments to the customer. Apple would presumably order the number of parts it needed to build the number of phones it expected to sell. Its manufacturing partners would then translate that into the numbers that they would need to manufacture for Apple.

The true test of whether the analysts or worried investors are right will come next week during Apple's earnings announcement, when everyone can see whether iPhone 5 sales were what they expected. After Apple disclosed its profits for the last quarter, investors indicated their displeasure at what they perceived as inadequate iPhone sales.

Image courtesy of Flickr user thetaxhaven