Apple needs a cheaper iPhone to keep pace with low-cost rivals, analysts said, after the company's smartphone sales fell short of lofty expectations in the holiday shopping season.
Apple's shares fell as much as 8.8 percent on Tuesday, their steepest decline in a year, a day after the company's weak revenue forecast for the current quarter renewed fears about Chinese smartphone demand and a tepid global market.
The world's most valuable technology company had lost $43 billion (AUD$49 billion) of its market capitalisation - more than the entire market value of Twitter - at the stock's intra-day low of $502.07.
Activist investor Carl Icahn, who is waging a public campaign to get Apple to return more cash to shareholders, bought up $500 million worth of Apple stock - his third purchase of the same size in less than a week - to boost his total investment in the iPhone maker to more than $4 billion.
At least 14 brokerages lowered their price targets on Apple, reflecting concerns that it was becoming harder to sell high-end phones as markets get saturated.
The record 51 million iPhones sold by Apple in the quarter ended December 28 fell short of the 55 million expected by Wall Street.
Analysts on Tuesday attributed some of this shortfall to the pricing of the iPhone 5C. Apple's low-cost alternative to its iPhone 5S was unable to grab market share from cheaper rivals using Google Android software, they said.
"We don't think Apple has created a meaningful new product category with the iPhone 5C," BMO Capital Markets analyst Keith Bachman wrote in a report.
He said Apple should create a "more impactful medium-price iPhone", with a lower price tag than the iPhone 5C launched in September.
The iPhone 5C sells for $549 (AUD$626) without a two-year contract with a telecom carrier. Samsung Electronics' flagship Galaxy S4 now sells for $530 without a contract in the United States, while Google Nexus 5 sells for $350.
Analysts said they were looking to the launch of the iPhone 6, a mid-range smartphone, and wearable devices such as iWatch in the second half of the year to boost investor confidence.
"Apple has the ability to lower the price of the iPhone to compete more aggressively in the midrange, and we believe the resulting elasticity would yield net profit improvements," Goldman Sachs analysts said.
Apple maintained its gross profit margin of 37.9 percent for the quarter just ended, as more people opted for the high-margin iPhone 5S than the 5C.
But rival Samsung, which has a phone for every budget, widened its lead over Apple by cornering 29.6 percent of the global smartphone market in the fourth quarter of 2013, ahead of Apple's 17.6 percent, data from research firm Strategy Analytics showed.
"The high-end smartphone market is simply looking saturated," Evercore analyst Rob Cihra wrote in a note. "Although adding a cut-rate low-end doesn't suit Apple's (business) model, not having one limits growth."
iPhone sales disappoint
Citigroup analyst Glen Yeung said the iPhone sales miss comes despite expectations of higher sales from China, where it signed a deal with China Mobile, and the addition of NTT DoCoMo as a carrier in Japan.
Analysts said slowing growth in iPhone sales was not just due to company-specific reasons, noting that Samsung's Galaxy phones have also been facing a decline in demand.
"There were a lot of reasons to believe iPhone sales would grow double-digit in units in 2014 even as the market matured, but 1Q results and the March guide pretty much put that thesis to rest," Raymond James analyst Tavis McCourt wrote in a note.
McCourt downgraded the stock to "outperform" from "strong buy" and cut his price target to $550 from $700.
Apple forecast sales of $42-$44 billion this quarter - brisker than usual because of its deal to sell iPhones through China Mobile, the country's No.1 carrier. Wall Street analysts on average had expected $46 billion.
"We had assumed the China Mobile partnership would mute March quarter seasonality, but this was overly optimistic," Goldman Sachs analysts said in the note.
Several analysts, however, said the China Mobile deal would begin to pay off as the company extends the partnership to 340 Chinese cities by the end of the year, from only 16 currently.