The Apple (AAPL) story is intact. The iPhone and iPad is selling out all over and the insatiable desire to own their sleek and very user-friendly products is at all-time highs.
But Apple does have a black-eye on the latest problems associated with the iPhone 4 antenna/reception problems. It is not only the fact that there is obviously a design flaw, but the way they handled the PR on this is not as user-friendly as is Apple’s usual manner.
One example is news that is flowing today that Steve Jobs was warned of the antenna problems ahead of the iPhone 4 launch. Over the past few week, this problem has been all over the news and shares have been dragged down along with the commentary. But this item over the pre-release warning is something that we had not heard before. So far, this is not confirmed (and never will be).
Then there was the comment that duct-tape should be used over the affected area to enhance the reception and the remarks by Steve Jobs that the iPhone 4 should be held differently in order to get the best reception.
But, the big daddy faux pa was the report that Apple is going to do a software fix that will change the way the signal reading shows up on the phone. It appears that Apple admits that the signal bars have never been accurate in the first place as the calculation that they used was flawed. Really? Yup, so now they said that they will be displaying the short, low signal bars bigger to provide better readability.
So, let me get this straight…. The iPhone 4 has a confirmed problem with reception if I hold it the wrong way. Consumer reports and others also provide detailed reports that further shows that this is true.
Now we are hearing that Apple will be holding a press conference to make an announcement tomorrow (Friday) at 1 PM ET to discuss the iPhone 4. Of course, no additional details of the conference were available. But, there is speculation that some type of plan is in the works to provide some type of fix. These could include:
- A free bumper case that will prevent the signal loss
- A credit in the amount of the bumper (approximately $29)
- A full recall
- A software patch
According to ISI Group:
“Distributing free bumpers could cost the company less than half a penny per share for every million iPhone 4s”
But, anyone who has studied the mindset of Steve Jobs knows that it is more about the style, look, feel and overall aesthetics than anything else. Software is important of course, but the hardware styling is in his blood. He would never go for duct tape, bumpers or anything that will ruin the look and user relationship. These are simply not going to satisfy Steve or anyone else.
So, the idea that Apple will do anything less than a full recall is unthinkable. With all of the cash (approaching $40 billion) that Apple has, and the way they are minting currency on their entire product line, this is the best answer from a publicity standpoint, a customer standpoint and a financial standpoint.
Mark Moskowitz over at JP Morgan writes:
If we were to assume a recall occurs soon, then we estimate 5 million smartphones would be replaced. We assume the users or channel partners would receive redesigned phones. The used phones would be retrofitted and resold. We think the estimated cost could be approximately $350 million, which we calculate could amount to a $0.38 hit to EPS or roughly 10% of our September quarter estimate.
The below table illustrates JP’s simple assumptions behind the cost of a recall program.
Apple continues to receive price upgrades through all of this and for whatever reason, most analysts do not believe that this is anything more that a bump in the road. Some have even called this a rounding error as they see the sales globally easily beating the street estimates this year.
If you believe in the longer-term story (and we do), the play will be to pick up shares as the recall is (if it is) announced as that will scare investors who are not looking at the bigger picture.
Below is the Horowitz & Company “OneSheet” – Notice that we are rating this as a 1.9 as the technicals look awful. Fundamentally, this is as solid as they come. So, once the overhang on the antennae issue is past, shares can see their way along the course toward a more reasonable level.