Updated Jan. 28, 2014 4:51 p.m. ET
Apple Inc. AAPL -7.99% Apple Inc. U.S.: Nasdaq $506.50 -44.00 -7.99% Jan. 28, 2014 4:00 pm Volume (Delayed 15m) : 36.94M AFTER HOURS $508.50 +2.00 +0.39% Jan. 28, 2014 7:59 pm Volume (Delayed 15m): 1.18M P/E Ratio 12.48 Market Cap $491.35 Billion Dividend Yield 2.41% Rev. per Employee $2,166,110 01/28/14 HEARD ON THE STREET: Apple's N... 01/28/14 Apple Shares Hit Three-Month L... 01/28/14 Apple's Drop, By the Numbers More quote details and news » shares fell 8% Tuesday and hit their lowest point in three months after disappointing iPhone sales raised concerns about the company's growth prospects.
The declining share price and increasing worries about the business could add pressure on Apple management to use its hefty cash holdings to buy back more stock, a position advocated by activist investor Carl Icahn, who said Tuesday that he bought $500 million more of the company's shares.
Apple's results Monday highlighted new dynamics and intensifying competition in the smartphone market. Apple continues to target the market for high-end phones, even as demand accelerates for lower-cost models, particularly in emerging markets. But Apple is resisting the urge to release a truly low-cost phone that could crimp profitability.
"Disappointing iPhone sales underscore near-term challenges for Apple," Mizuho analyst Abhey Lamba said. "Challenges in the high-end market will likely pressure [Apple's] revenue growth, margins and earnings."
The Cupertino, Calif., technology company said it sold 51 million iPhones in its fiscal first quarter ended Dec. 28, up 7% from the year-earlier period, after the company introduced two new models in September.
While the total represented a new quarterly record for Apple, it still fell short of analysts' expectations for 55 million units.
"We think the iPhone air pockets reflect broader slowing in the smartphone market and company-specific factors," J.P. Morgan JPM +1.18% JPMorgan Chase & Co. U.S.: NYSE $55.74 +0.65 +1.18% Jan. 28, 2014 4:01 pm Volume (Delayed 15m) : 17.92M AFTER HOURS $56.04 +0.30 +0.54% Jan. 28, 2014 7:56 pm Volume (Delayed 15m): 146,339 P/E Ratio 12.78 Market Cap $207.09 Billion Dividend Yield 2.73% Rev. per Employee $410,415 01/28/14 Turkey Gets Aggressive on Rate... 01/28/14 Technology Will Help Boost Som... 01/28/14 Banks Adding Staff for Post-Tu... More quote details and news » analyst Mark Moskowitz said. Specifically, he suggested Apple misread demand for the lower-priced iPhone 5C.
Last year, Apple introduced for the first time a lower-priced model along with its flagship iPhone. The new 5C provided consumers with a wider choice of price points for the device, but it was only $100 cheaper than the flagship 5S, and customers continued to opt for the premium phone.
Apple didn't point to the 5C as the culprit, but Chief Executive Tim Cook said the iPhone "did not do well" in North America because the demand "mix was stronger to the 5S." Mr. Cook said consumers flocked to the 5S because of its fingerprint sensor, a feature missing from the 5C.
Chief Financial Officer Peter Oppenheimer said in an interview that Apple didn't have enough supply of the 5S until the end of the quarter, but he didn't mention the 5C in his comments.
Apple also noted that iPhone demand in North America was hurt by upgrade policy changes at wireless carriers, which made it tougher for customers to buy discounted iPhones before the end of their two-year contracts. Mr. Moskowitz, the J.P. Morgan analyst, said the changes "could have an impact for a few more quarters."
Shares of Apple, which hit a low Tuesday of $502.07, closed at $506.50, erasing more than $39 billion in the company's market value. The stock is now down 4.4% over the past three months
Mr. Moskowitz still recommended the stock. "We think the issues are explainable and can be overcome," he said.
Others aren't as sure. "The clear maturation of the high-end smartphone market limits Apple's growth potential in the near term and its valuation," said Raymond James analyst Tavis McCourt, who downgraded the stock to outperform from strong buy.
Meanwhile on Tuesday, Mr. Icahn said he raised his total holdings in Apple to about $4 billion. The company's overall market value is about $452 billion, according to FactSet.
The investor and Apple have disagreed over what the company should do with its cash hoard of more than $150 billion. While Apple is buying back shares, Mr. Icahn doesn't consider the pace and amount sufficient.
In a tweet, Mr. Icahn said, "Just bought $500 mln more $AAPL shares. My buying seems to be going neck-and-neck with Apple's buyback program, but hope they win that race."
A representative from Apple wasn't available for comment Tuesday.
"Carl Icahn's push for a more aggressive share repurchase program could resonate with shareholders, and we expect his voice to become even louder in the coming weeks," Cantor Fitzgerald analyst Brian J. White said.
—Ben Fox Rubin contributed to this article.
Write to Daisuke Wakabayashi at Daisuke.Wakabayashi@wsj.com and George Stahl at george.stahl@wsj.com
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