Tech

Why everyone was wrong about Apple

Apple's Phil Schiller speaks about the new iPhone 5C on Tuesday.
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Apple just can't seem to keep Wall Street happy.

The tech giant's stock was down by about 5 percent on Wednesday afternoon after disappointing the street in two big ways this week. First, Apple didn't meet pricing expectations with its iPhone 5C and second, the company failed to announce a deal with China Mobile.

Investors and analysts anticipated the iPhone 5C would price in the midtier market at about $350 unsubsidized. However, the smartphone costs over $500 without a contract and about $100 with a two-year contract, a price that is still too high for Apple to sell the device in emerging markets, industry experts said. In China, for example, an unsubsidized iPhone 5C will cost 4,488 renminbi, the equivalent to $733.

(Read more: Apple: Sell the news?)

"Just how far behind is Apple trying to fall? I do not get Tuesday's release and product launches. Something is just wrong," Doug Kass of Seabreeze Partners Management said in a note Wednesday.

The developed world is saturated with smartphones at the high end, so any future growth will have to be geared toward emerging markets, Kass said. And customers in emerging markets are price-sensitive and want a lower-priced phone, but the iPhone 5C—or "iPhone dud," as Kass describes it—won't be cheap enough to drive market share gains that could lead to earnings growth.

(Read more: Hey Apple, where's that Steve Jobs-inspired iTV?)

"The iPhone 5C, we are kind of concerned that it's being priced at $550 unsubsidized at the least in all markets of the world," said Kulbinder Garcha, managing director and analyst at Credit Suisse. "That's going to compete with the best and newest offerings from let's say a Samsung, who has bigger screens and better processors and cameras. What all this means is it really impacts the earnings growth."

Credit Suisse downgraded its rating for Apple on Wednesday from "outperform" to "neutral," but maintained its $525 price rating for the stock.

While many industry experts acknowledged on Tuesday that the high price wasn't ideal, they defended Apple's bet on the premium market because it meant the company didn't have to sacrifice margins.

(Read more: Apple's new iPhone 5C may be priced just right)

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Rotten Apple? Stock falls after event

But the thing about the tech industry is that margins always have to come down at some point, said Channing Smith, managing director of Capital Advisors and co-manager of Capital Advisors Growth Fund.

"Margins are going to have to come down, investors are going to have to realize that. When you move into emerging markets, price points are much lower. As you go through technology cycles, price points come down because innovation becomes harder and harder to come by," Channing said Tuesday on CNBC's "Squawk on the Street."

"Apple is going to have to realize that at some point. If you can lower that price point and get the volume growth, you are going to be fine because your earnings are going to come in and that's going to attract investors back into the stock."

Kass said that Apple is making a mistake when it comes to trying to maintain high margins because growing market share is actually more valuable.

"I fully recognize that Apple must somehow walk a tightrope between sustaining (elevated) profit margins and growing market share, but it did neither with yesterday's announcements. Rather, it slipped badly," Kass said Wednesday.

"From my perch, market share now is so valuable, not current gross margins—it remains my view that Apple is making a strategic mistake. Is Apple trying to lose as much market share as possible in a world where the value of the market share is immense given the ecosystem that goes along with it?"

On Tuesday, many analysts were also betting big that Apple would finally announce a deal with China Mobile, which boasts more than 700 million subscribers.

Industry experts said that such a deal could potentially offset any damage to sales caused by the high price of an iPhone 5C.

Gene Munster, an analyst at Piper Jaffray, even told CNBC on Tuesday that he was 99 percent a deal with China Mobile would be announced Wednesday and defended Apple's aggressive pricing strategy.

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Apple event: What we know

"Ultimately, China Mobile is a huge opportunity, and that's going to be a positive," Munster said on CNBC's "Squawk on the Street." "It's a bold move. They are basically saying that they don't need price at this point to drive demand, and obviously getting a big carrier like China Mobile is going to be a huge factor in that."

The only problem is that a deal with China Mobile—which was widely speculated to happen on Wednesday at an Apple event in Beijing—didn't happen.

Munster revised his price target for the stock to $640 from $655, but maintained an "overweight" rating. He also said that he does expect a deal with China Mobile by the March quarter.

UBS also lowered its price target from $560 to $520 and downgraded the stock from "buy" to "neutral." Bank of America revised its rating from "buy" to "neutral" as well, but kept its $520 price target and Citi kept its $430 price target as well as its neutral rating for the stock.

Despite the street's disappointment in Apple, there's still the chance of some silver linings, Smith said.

"We don't want to count Apple out yet, the good thing about a high price point is that they can always come down on that. We were disappointed with China Mobile, we didn't see a deal there last night," Smith said.

"We want to see how the product sells in emerging markets, but we think the street's reaction today is probably right. There's definitely some skepticism in how they are going to do in emerging markets and whether we are going to see that next leg of emerging markets, so we are a little bit more troubled."

By CNBC's Cadie Thompson. Follow her on Twitter @CadieThompson.