Apple Not Up to the Mark, Yet Good
Rita is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The share prices of the very famous iPhone maker, Apple (NASDAQ: AAPL), took a beating and dropped 5.3% after the company came out with its fiscal 2012 third quarter earnings on July 24 and failed to live up to Mr. Market’s expectations. Though Apple matched up to its own guidance for the third quarter, the Street’s expectations attached to Apple were a lot more and the miss got a negative response from the Wall Street. For the first time in almost a decade the company reported numbers lower than expected, making Apple the second company to make a not so welcoming record this quarter after Microsoft (NASDAQ: MSFT), which reported a loss for the first time since it went public in 1986.
The quarter and its numbers
Apple had a good quarter with good growth in both top line and bottom line. The company also matched up to its own words. Last quarter, Apple had provided revenue guidance data where the management mentioned they expected the third quarter revenues to be around $34 billion. Apple was right to expect this figure as evident from the reported actual revenue of $35 billion. The top line surged 22% from the prior year period, and the bottom line stood at $8.8 billion profit, which comes to an EPS of $9.32 per diluted share, representing a 21% year on year growth. Over the same period, iPhone shipment increased 28% and the iPad shipment improved by a whopping 84%. The strongest contribution to the top line came from iPhones, which accounted for about 47% of the revenue, followed by 26% from the iPads. So, from all these it’s easy to conclude that things are looking good for Apple.
However, I feel the consumer electronics segment is a very dynamic and fast moving space and that’s why it’s irrelevant to compare Apple’s present performance with that in the year ago quarter. Rather, a comparison with the immediate preceding quarter is more logical and more likely to provide a better understanding of the company’s performance. The second quarter of fiscal 2012 had been an exceptional quarter for Apple. The company had reposted a 94% year on year increase in its net profit. In comparison to the second quarter, Apple’s third quarter performance was not up to the mark as total revenue decreased by 10% while the bottom line was lowered by 24%. Even iPhone shipments were down by 26% from 35.1 million and iPod shipments were down by 12% from 7.7 million. Only iPad shipments showed positive growth, a surge of 44% sequentially.
What’s going on?
Fine! Apple did not do that well in comparison to the previous quarter. But in no way was this quarter bad. Surely there were some limitations and a closer look at them will explain the situation better.
Though Apple had a brilliant quarter thanks to the 17 million iPads and the 26 million iPhones sold, the company could not make the most out of these huge volumes. The company is facing a decline in the average selling price for the devices since the consumers are buying more of the inexpensive models of both iPhones and iPads. Though the company launched a new iPad a few months back, it kept the older model available for sale after slashing its price. We all have heard about the marketing jargon “product cannibalization,” which refers to the fall in sales volume or market share of a product due to the introduction of a newer product by the same entity. But, here the case is of reverse product cannibalization where the older models are eating up the markets for the newer models. This phenomenon is having a direct impact on the top line, keeping it from achieving the possible level.
Another factor that influenced the top line growth was that consumers were putting a hold action on their purchase decisions in anticipation of the much talked about iPhone 5. The consumer’s psychology is understandable as everyone knows an iPhone is anything but cheap. Again, this is not new to the company. On several previous occasions, iPhone sales have shown signs of decline two to three months before the launch of the next model. This time the consumers are expecting the latest iPhone to hit the streets in October. Most likely, this is just a trend that is back and only to fade away with the launch of the new iPhone.
However, a recent set of data regarding the possible outlook of the phone OS market grabbed my attention and I thought it has relevance with today’s topic. So, here it is.
Smartphone OS Market Share: 2012 to 2016
According to latest data from International Data Corp. (IDC), Google’s (NASDAQ: GOOG) Android platform accounts for 61% share of the worldwide smartphone operating system market whereas Apple is way down at just 20.5% and Microsoft holds just 5.2%. But, by 2016, IDC feels the scenario will change a lot as Microsoft rises to capture almost 19% of the market share by eating into Google and Apple’s share and becoming at par with Apple.
Already Apple is facing stiff competition from the South Korean smartphone maker Samsung. With a wide range of device offerings across Android and Windows platforms, Samsung might pose an even bigger threat to Apple’s growth in the year to come. And let’s not forget Nokia, soon to be powered by the latest from Windows.
Concluding thoughts
It is believed that Apple functions the best in the face of competition. So, though the peers are preparing themselves to snatch away Apple’s share, I feel the chances of that actually happening are pretty low. The company has startled us time and again with its offerings. Things are also looking good in the near future. The biggest holiday season is just a few months away and Apple will surely make the most out of it with the launch of the iPhone 5.
The factors, such as low smartphone shipments, which limited Apple’s growth this quarter, will be the exact factors to push the sales in the coming quarter. Again, there are more reasons for an investor to be pulled toward this stock as the company announced a dividend of $2.65 per common share. Apple expects the fourth quarter revenue to be somewhere around $34 billion with EPS of $7.65. Though in this quarter Apple could not surpass the market’s expectations, there are high chances that the company will be back to its previous form to beat the estimates and make everyone smile. Though Apple was not up to the mark this quarter, I am bullish on this stock.
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