10 Thoughts After Apple's Q2 2013 Earnings Release

Robbie is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Apple's (NASDAQ: AAPL) recently announced earnings (2Q 2013) proved to be a mixed bag for investors and many (including myself) are questioning an investment in Apple. The market quickly responded to the call by trading about 5% higher than it closed just a few minutes earlier. Good news, right?
Well, it seems the market had a change of heart because in pre-market trading the day after earnings, the market dropped over 2% from the previous day's close (a swing of over 7%).  Why the large movements in the share price?  Let's cover a few of the highlights.
  1. Tim Cook, Apple CEO, said in the call that “We’ve got some really great stuff coming in the fall and across all of 2014." That tells me they aren't going to release anything for the next three months. They will announce new features in iOS 7 in June at WWDC, which may hint at new technologies in the iPhone (e.g. If they significantly upgrade Passbook, it would signal to me that near field communication would be coming to the iPhone -- more on that later). 
  2. As demonstrated once again by this report, the iPhone and iPad drive Apple's sales (iPhone 53%, iPad 20%).  The iPad is in a comfortable position as the market leader with options on the high end (full size iPad) and the low end (iPad Mini). The latest product release (iPad Mini) is significant as it demonstrates Apple understands that lower priced tablets had the ability (and in fact were starting) to disrupt its dominant tablet market share. Will they realize the same thing soon with larger phones that Samsung and HTC have deployed? To date, Apple is refusing to go with a larger iPhone and Cook dismissed the notion in the 2Q conference call.
  3. The stock has dropped over 40% since its highs in September 2012 of over $700/share. Investors worry that Apple's innovation machine is broken with the absence of their creative force, Steve Jobs, but is the future really that dim for Apple? As Benjamin Graham, famous value investor and Warren Buffett's teacher once said, “In the short term, stocks are a voting machine and in the long term, stocks are a weighing machine.”  To me, that means that in the short term, investors trade on rumors, trends and fear/greed while in the long term a stock ultimately rises or falls based on hard data (earnings, cash flow, etc.).
  4. The stock had a year over year profit decrease for the first time in a decade. That's concerning. The bears would say it is a sign of things to come and eventually a pattern that all phone makers experience as they begin their decline (Nokia, BlackBerry, etc.). Logically, in the technology space, what goes up must eventually come down, right? 
  5. Carriers like Verizon (NYSE: VZ) and AT&T (NYSE: T) are really getting hammered in the amount they pay to subsidize the phones we carry in our pocket. When the iPhone came out, it was so revolutionary that AT&T jumped at the opportunity to pay a little up front to get the opportunity to service the new subscribers over time. What they found though, was that their margins suffered. As an example, in the first quarter that the iPhone went on sale at Verizon, their service margin fell from 46.4% to 43.7%. The more iPhones carriers sell, the worse their plight. AT&T posted a 28.7% margin as compared to 37.6% a year earlier.  Why? One factor is that they sold nearly twice as many iPhones as Verizon in that quarter. It isn't all bad news. Obviously they can monetize their long-term subscriber base.  This is what they are banking on.  But now, all the major phone networks have the iPhone and the smart phone has become more of a commodity. Will they be as willing to pay the subsidy of an iPhone when other devices require them to pay less?  
  6. The open platform offered by Google (NASDAQ: GOOG) (Android) is more compelling for the phone makers. With Android, device makers like Samsung and HTC can customize the mobile operating system to be unique to their device. This ultimately fuels innovative features as each hardware maker attempts to one-up their competition while still remaining a Google product.  When coupled with increased hardware specs from the device makers when compared to the iPhone, the Android system is compelling for both users and the hardware makers. That fact is certainly reflected in the dramatic market share increases Android has seen in only a few short years.
    <img alt="" src="http://g.fool.com/editorial/images/35668/us-smartphone-market-share_large.png" />
  7. Apple raised the dividend by 15% and announced a $100 billion share buyback program (the buyback alone is bigger than over 90% of the companies on the market).  Over the next three years, those are great things for investors, but over the next three months?  I'm not so sure that moves the price of the stock much higher.
  8. There are reports that Apple has delayed the iPhone 5S release due to fingerprint ID scanner issues (a feature to be incorporated on that phone) and rejected what 8 million devices (read a boatload of phones) from their supplier, Foxconn.  That's not going to help the stock rebound anytime soon.
  9. Apple has about $150 billion on the balance sheet now, but most of that is overseas and would face stiff repatriation taxes. There is a possibility (I think a small one) that the U.S. government could announce a special rate for a limited time to flood the market with additional capital without printing money, but the administration has been mum on the issue to this point.  
  10. I think Apple can hit a home run by incorporating near field communication (mobile payment) into the iPhone and the iWatch system (separate or together). I really don't like the idea of a TV as the refresh cycles are too long (I've had my TV for five years now). That said, if Apple can make a good margin on it initially, it can be a growth driver for a couple of years (which then gives Apple the time to innovate even further -- think of the original iPhone as compared to the iPhone 5).

I can argue both sides of the discussion here. I'm a long-term value investor. On that thesis, I want to hold Apple for at least the next year to let things play out. However, I think there are other great values in the market right now. If I don't think Apple has much hope of gaining big in the short term, isn't it better to deploy that capital somewhere it can be more effective? Weigh in below and let me know your thoughts.

Robbie Laney has positions in Apple and Google. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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