Apple: Fiscal Q3 Earnings – Accentuate the Negative. Ignore the Positive!

By Jaan Seunnasepp - August 2, 2012 | Tickers: AAPL, BBRY, DELL, MSFT | 0 Comments

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On July 25^th, Apple (NASDAQ: AAPL) stock shed approximately $26 as investors reacted to the earnings release that did not meet analyst expectations. In particular, the number of iPhones sold was way below the predictions. Apple sold 26 million iPhones last quarter, compared to analyst predictions of 28.4 million. This led to the disappointing figure of $9.32 per share, where analysts had predicted a profit of $10.37 per share. People threw up their hands in horror and quickly drove the price down, down, down.

(Apple 1 Month - source: Yahoo)

But was this wise? Or was it an over reaction? Let’s look at the situation in a bit more detail.

iPhone

First, just how bad where the iPhone sales? Apple sold 26.0 million iPhones in the quarter, representing 28% unit growth over the year-ago quarter. Is this really that bad? We are in a down economy (particularly Europe), plus there have been rumors that the next version of the iPhone will be a major change, so this most likely also pressured sales. Given all this, they still grew volume by 28%. Finally, many of the “missing sales” are merely deferred sales – they will be realized when the new model is released. So, while it is a bit disappointing, in context it is but a part of a larger picture.

Now for the good news…

iPad and Mac and Margin

Apple sold a record 17.0 million iPads during the quarter, an 84% unit increase over the year-ago quarter. According to Strategy Analytics, in Q2-2012, Apple “maintained its strong market leadership with a 68 percent share” which is up from 62% a year ago. It seems the iPad is driving growth of the tablet market. It is actually growing market share in spite of new entries into the product space.

Apple sold 4.0 million Macs during the quarter, a two percent unit increase over the year-ago quarter. This occurs even though the overall PC market is down.

Finally, the gross margin was 42.8 percent compared to 41.7 percent in the year-ago quarter. So, in spite of new competition, and the addition of lower priced items to the iPhone and iPad lines, margins are improving rather than deteriorating.

So Apple is continuing upward, even as competitors such as Microsoft (NASDAQ: MSFT),  Research In Motion (NASDAQ: BBRY) and Dell (NASDAQ: DELL) are having trouble.

Analysis

So, profits are up 20%. In this economy, where other companies are seeing shrinking sales, this is superlative. This is not the 60 percent or more earnings growth that we have seen in the past, but still it is excellent, showing that even in this slow economy Apple continues to grow.

The question remains:

What does the future hold. Is this just the beginning of a slide in the growth rate? Is it the beginning of a complete turnaround in Apple’s fortune? Or is it just a hiccup on the continued road of exceptionally high growth? That is, will Apple in the next few quarters return to the growth of the last few years?

Of course the answer to this will depend in part on the overall worldwide economy. So, your personal answer to this question will depend on your personal view of the situation. But another part depends on the other factors in the equation.

As I see it, the worldwide economy has taken a toll on Apple’s earnings. However, it is also likely that the rumors of a new iPhone have also had a negative impact on sales. If this is the case, then we should see a huge rebound once the new model is released. This could take us back to 40 – 50 percent growth for several more quarters (assuming the global economy does not worsen).  

This price drop is very typical for Apple stock. Anytime there is a hint of negativity in an earnings report, the stock tanks. But after some days, the realization takes over that the glass is not half empty, but rather 90% full. Even if we were to continue on only a 20% growth rate, then the value of Apple should continue to grow accordingly.

I look for contnued growth for some years to come. And this is without anything new in the pipeline.

==== Note

Rita Chattaraj has a good post on Apple's new Mountain Lion vesrion of its OSX, comparing it to Windows.

Will You Ride the Mountain Lion or Stay Behind the Windows?

==== Understanding Apple series

You may love Apple and their products, or hate them to the core, but you cannot deny that Apple now has the highest market cap of any company, their products are trend setters, and currently they are trading at rather low multiples, especially regarding forward earnings.

Warren Buffet has the maxim: “Invest in what you know!” So, for those who want a unique perspective on Apple’s success, I have a series of articles Understanding Apple. I hope you will find them helpful and provocative.

Let me know what you think.

=====

Malcolm Manness has a Masters degree in Computer Science, and has worked for 14 years in development, technical publications and software quality assurance. He has been investing for 20 years. His short fiction can be found (under pseudonym J. Seunnasepp) at http://50CentFlash.com/.

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