The loss snaps a 20-match win streak for Serena.
Williams had been cruising prior to the defeat. The No. 3-seeded American, who won Wimbledon, gold at the 2012 London Olympics and the U.S. Open last year, had not lost in singles play since last August, when she fell to Angelique Kerber in the quarterfinals of the WTA Tour Western & Southern Open.
Prior to her loss, Williams had not dropped a single set since the 2012 U.S. Open final against Victoria Azarenka, which she won in three sets.
The 31-year-old's unrivaled serve, which could likely hold its own in the men's game, was on fire in the early stages at Melbourne Park, but proved beatable in the end.
Back spasms throughout the second half of the match certainly didn't help. The 15-time Grand Slam winner hurt her back trying to avoid the net in the second set.
She called for a trainer after the ninth game with the score 5-4 and on serve. She had trouble getting her serve above 90 mph after.
Williams let out her frustrations on her racket in the third set. Feeling the match slipping away, she smashed the it twice on the court during the set's 2-1 changeover and then tossed it in her bag.
Serena fell in the fourth round a year ago and missed the tournament altogether in 2011 while recovering from a foot injury. Although she won't win her third straight major, she has created some momentum early in 2013.
Despite her loss, Williams will remain one of the top contenders in the women's game throughout 2013. As far as the year's other three Slams are concerned, one has to believe that Williams will be in the mix. After all, she has 10 combined career Slam wins between the French Open, Wimbledon and the U.S. Open.
Stephens, ranked No. 25 in WTA singles, is now 10-2 this season and will move on to face Victoria Azarenka in her first Grand Slam semifinal.
Stephens is the first American player younger than Serena to ever beat her.
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