iPhone 4: Born Under a Bad Sign?

The iPhone 4 has racked up spectacular sales since its launch in June, but it looks as if it's racking up equally spectacular problems for Apple (Nasdaq: AAPL).

This week, it took two body blows. One was a statement from Consumers Reports, which said it can't recommend the iPhone 4 because of its connectivity problems. The other was a federal judge's approval of granting class-action status to a suit filed by iPhone buyers in late 2007 against Apple and AT&T (NYSE: T).

News of the Consumer Reports assessment sent Apple shares sliding. They closed Tuesday at US$251.80, down $5.49. Trading was volatile, and Apple share prices were around the $247 mark at one point in the day.

That volatile trading could be taken as a sign that some investors still have confidence in Apple. Still, it does not bode well for the company, whose handling of the iPhone 4 communications problem appears to be a public relations mess.

Consumer Reports' Body Slam

Consumer Reports kicked off what may turn out to be a bad week for Apple with a statement on Monday that it can't recommend the iPhone 4 because there's a problem with its reception.

The organization came to this conclusion after testing three iPhone 4s purchased from different retailers in New York.

"Our findings call into question the recent claim by Apple that the iPhone 4's signal-strength issues were largely an optical illusion caused by faulty software," Consumer Reports' Mike Givas said. Apart from that, Givas had high praise for the iPhone 4.

Handsome Is as Handsome Does?

Apple's reaction to reports of the iPhone 4's poor reception has raised concerns.

First, the company claimed that users were holding the device incorrectly. Then it claimed that the problem was due to a software glitch that resulted in the signal strength displays showing signals to be stronger than they actually were. At one point, Apple chairman and CEO Steve Jobs, in an email to a customer, apparently denied that there was any reception problem.

On Tuesday, reports surfaced that queries or comments posted by users on Apple's tech support forum regarding Consumer Reports' refusal to recommend the iPhone 4 appeared to be deleted.

Some analysts have warned that Apple needs to mend fences with customers as quickly as possible or risk seeing them turning to other platforms such as Android.

However, the danger to Apple of this iPhone fiasco is overblown, Ben Reitzes, an analyst at Barclays Capital, wrote in a note to investors Tuesday.

"To date, we have not seen any overwhelming evidence of iPhone 4 units being returned," Reitzes wrote. "We do not believe these issues will materially impact AAPL's product momentum."

The Long Arm of the Law

Also on Monday, Judge James Ware of the U.S. District Court for the Northern District of California accorded class-action status to several lawsuits filed by iPhone buyers against Apple and AT&T back in 2007.

The class-action suit seeks an injunction to prevent Apple from selling "locked" iPhones that will only work on AT&T's network in the United States, AP reported. It also seeks to overturn Apple's control over what programs iPhone owners can install on their devices.

Further, the suit contends that Apple secretly made AT&T its exclusive iPhone carrier for five years, according to the report. Consequently, although customers signed two-year contracts with AT&T when they bought iPhones, they were really locked into a five-year relationship with the carrier, the lawsuit contends. The lawsuit claims these actions hurt competition and drove up prices for consumers.

The lawsuit is not a big deal, in and of itself -- most vendors tend to settle these out of court. However, its impact may extend beyond the courts in that it could spur Congress and federal agencies such as the United States Department of Justice, which is already keeping an eye on Apple, to step up its probe, especially in terms of antitrust issues.

That could be more difficult for Apple to deal with, so keep an eye peeled for reports that Congress or the feds are launching investigations of the company.

The Android Threat

Meanwhile, the iPhone 4 is coming under increasing pressure from Android smartphones. Android smartphones saw significant growth in the U.S. market, gaining four percentage points to take 13 percent of the market in May, Comscore reported.

Google (Nasdaq: GOOG) ratcheted up the ante on Monday, offering free software that lets anyone develop Android apps, even if they don't have much training in programming, in a bid to further increase the number of apps available for the platform.

That will continue and transcend Apple's achievement of turning hobbyists into app developers, Al Hilwa, program director at IDC, told MacNewsWorld.

"Apple brought a lot of hobbyists into the developer fold," Hilwa pointed out. "Google's offering the appeal of application development to a broader section of hobbyists by making it easier to develop apps," he said.

"The kind of applications written today -- gaming, social media and social interaction apps -- are more suited than ever to hobbyist developers than to corporate and enterprise developers," Hilwa said. "This will pose a challenge to Apple."

Light at the End of the Tunnel?

Despite these problems, there's good news for Apple.

It opened a new flagship Apple store in Shanghai last week, and it plans to open 24 more retail stores in China over the next two years. The move is significant because an increasing percentage of the company's earnings is coming from overseas.

This overseas demand will keep sales of the iPod line strong.

"Apple's still selling a lot of iPod touches, and the international market is beginning to pick up the iPod family as well," Brian Marshall, an analyst at Gleacher, told MacNewsWorld.

Meanwhile, executives at Wells Fargo (NYSE: WFC) and SAP (NYSE: SAP), as well as sales representatives at 40 Mercedes-Benz dealerships in the United States, are reportedly flocking to use the iPad, according to a Bloomberg report.

That bodes well for corporate iPad sales.

Analysts expect Apple to exceed guidance when it presents its A3 2010 earnings report June 20.

"We expect to see an earnings per share upside in the June 2010 quarter and conservative guidance for September 2010 when Apple reports on July 20," Gleacher's Marshall wrote to shareholders.

The July 20 earnings call will indicate higher iPad and Mac sales than Apple had forecast previously, Barclays Capital's Reitzes wrote.

Meanwhile, NPD Research found that Mac sales had grown 35 percent year over year in May.

Marshall expects Apple to continue performing well over the rest of the year.

"While Apple has nicely outperformed the broad market year-to-date, being up 18 percent vs. the S&P 500's loss of 8 percent, we believe it has more to offer shareholders in the second half of 2010," Marshall wrote.

Marshall has raised his earnings per share figure for calendar 2011 by 4 percent, to $18.50.

So yes, Apple is still a buy.

Remember that although customers in the U.S. may be angry at its handling of the iPhone 4 communications affair and it's facing a class-action lawsuit, the company's major markets are now overseas.