SAN FRANCISCO Apple Inc's (AAPL.O) shares fell below $400 on Wednesday for the first time since December 2011 after a chip supplier's disappointing revenue forecast fanned fears about weakening demand for the iPhone and iPad as competition intensifies.
The stock dropped below $400 briefly before bouncing back to end 5.5 percent lower at $402.80, losing more than $22 billion of market value in a single day.
Cirrus Logic (CRUS.O), which makes analog and audio chips for the iPhone and iPad, on Tuesday warned of a reduced product forecast from one customer - which it did not name. But 90 percent or more of its business comes from Apple, making it a key indicator of demand for iPhones and iPads.
The surprise warning fueled fears that demand for the iPhone - which makes up more than half of Apple's revenue - is falling faster than expected as Samsung Electronics and other rivals who use Google Inc's Android software flood the market with cheaper phones. Typically, many Apple fans also hold off on buying the gadgets if they believe a new model will be introduced in the next few months.
Apple is to report quarterly results on Tuesday. Analysts say Cirrus Logic's reduced outlook lends weight to arguments that consumers' love affair with the iPhone is waning as challengers such as Samsung (005930.KS) vie for their attention.
"This is a tough environment. Apple is in transition between products," said Michael Yoshikami, a portfolio manager at Destination Wealth Management, which owns about 50,000 Apple shares. Cirrus's warning "makes it more likely Apple's not going to surprise on upside."
Since its September 2012 peak, Apple has lost 40 percent of its market value or more than $280 billion - slightly more than Google's entire capitalization - battered by worries about the effect on Apple's industry-leading margins if it's forced to do faster updates of its products to keep up.
Some believe Apple will not be able to sustain its high gross margins as competition in the tablet and smartphone markets leads to lower prices. Shorter product cycles limit Apple's ability to bring down component costs, Bernstein Research analyst Toni Sacconaghi said in a note to clients.
Cirrus's weak forecast follows a 19 percent decline in first-quarter sales at Taiwan's Hon Hai Precision Industry Co Ltd (2317.TW), Apple's main contract manufacturer.
"It's a reminder of weakening demand and the challenges around product transitions," Shannon Cross, of Cross Research, said. "There's not a lot of conviction about what the second half is going to look like."
Verizon Communications Inc (VZ.N), which with Vodafone controls the No. 1 U.S. wireless carrier Verizon Wireless, reports results on Thursday and may offer more clues to iPhone and iPad demand in the quarter.
Investors are growing increasingly nervous about Apple's growth prospects.
Shares of other chip makers and Apple suppliers, including Qualcomm (QCOM.O), Avago Technologies (AVGO.O), Broadcom (BRCM.O) and Skyworks (SWKS.O), fell between 2 and 6 percent on a day that saw broad weakness in financial markets.
Goldman Sachs analyst Bill Shope said in a note on Wednesday that Apple's momentum could weaken further before it launches new products later this year.
Apple, which relies heavily on new products to drive its revenue growth, has not had a launch since last October when it unveiled its 7.9-inch iPad mini and an updated full-size iPad.
The company typically launches a new iPad in the spring, but it is unlikely to do so because of the October update. Looking forward, investors now expect an upcoming new iPhone to power earnings in the second half. The two versions of the iPad are also likely to get an update in the fall.
In the past week, analysts had reduced their estimates for Apple's March quarter revenue on average to $42.53 billion from $42.68 billion. Following Cirrus' warning on Tuesday, some think Apple's results could miss those already reduced expectations.
Apple is expected to report a 9 percent increase in quarterly revenue, with net profit expected to decline 17 percent to $9.59 billion, or $10.08 a share, for its fiscal second quarter, according to average analysts' estimates.
Sacconaghi, who lowered his revenue estimate to $41.1 billion from $42.4 billion, said he expects mixed results with Apple's revenue coming in below consensus and earnings per share largely as expected.
Apple's implied volatility, which measures perceived risk of future stock movement, shot up on Wednesday. The implied volatility for the next 30 days for Apple stood at 43.73 percent, a 16.7 percent increase.
Share price volatility should increase into earnings and surpass an annual high in the next few days, said Ophir Gottlieb, managing director of options analytics firm Livevol. (Additional reporting By Edwin Chan; Editing by Maureen Bavdek, Andrew Hay, Leslie Adler and Cynthia Osterman)