Apple’s Q1 Earnings: Will Analysts Miss Estimates Again?
Richard is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
There’s no shortage of experts on Wall Street. All you need to do is ask any analyst and they will gladly explain their credentials. However, when the topic centers on Apple (NASDAQ: AAPL), they truly have no clue. And there’s evidence this all over the place, most recently with an ill-timed report by the Wall Street Journal suggesting that Apple had cut its iPhone 5 orders.
On the news, Apple shares dropped almost 4%, falling below $500 for the first time in almost a year. Except, as Wedge Partners’ analysts Brian Blair pointed out, Wall Street Journal got it wrong. Blair said that the cuts were primarily related to normal seasonal patterns coming off of the holiday period. Besides, they were within the normal 15%-25% range, not the 50% range that was reported by the WSJ.
To date, Apple investors are still waiting for an apology – but it won’t come. Nor have analysts proved capable of pinpointing Apple’s estimates. However, they are quick to point out that Apple “missed” estimates. Rather, it is the analysts who have missed Apple’s estimates – not the other way around. And it’s time for the Street to take a more realistic view of where the company is.
For instance, in Apple’s Q4 the company reported a net income of $8.2 billion, or $8.67 per share on revenues of $35.97 billion – beating revenue expectations. But that Apple fell short of EPS estimates of $8.85 somehow created “an aura of uncertainty” about its future. Never mind that sales surged 27% year-over-year. Also, why let a small detail like 23% profit growth affect a great “bear case?”
In the quarter, Apple sold 27 million iPhones – representing an annual unit growth of 58%. Likewise, iPads also performed well, growing 26% to 14 million. Impressively, gross margins arrived at 40%, declining slightly by less than half of a percent. However, this was the result of a 27% increase in costs. But can we realistically blame the company?
Apple has to deal with rivals such as Google and Microsoft that want nothing more than to put it out of business. And despite these rising costs, the company still managed to post over $41 billion in profits for the full fiscal year – a remarkable feat considering the tough macro climate.
Not All Good Things Come to an End
Of course I don’t really believe this, but analysts have been racing each other to predict the bottom. It’s been embarrassing to watch how quickly they’ve jumped off the bandwagon. They used Apple to sell stories on the way up, now they’re back at it again on the way down. Granted, the company has been knocked down of late – shedding billions in market cap. But it’s not fundamentally related.
What was the catalyst? Let’s look at Apple’s own guidance during Q4. The company said for Q1 it expects to earn $11.75 per share on revenues of $52 billion. The company’s profit margin projections were also a bit low, especially after coming off a quarter during which 20 basis points were shed. This sent the Street into a panic and analysts have yet to recover.
First, Apple is known to under-promise and over-deliver. And we have to assume that Apple knows its business better than anyone. Also, the company has never operated on the assumed movement of its stock price. On this basis, the stock is now considered expensive. This is despite the fact that shares have fallen from 30% from an all-time high of $705 to a P/E of 11.
To date, it has been a race among analysts to see who can cut estimates lower ahead of the company’s Q1 report. For instance, RBC Capital’s Amit Daryanani trimmed EPS estimates citing (among other things) iPad 4 cannibalization. Daryanani cut his price target on the stock from $750 to $725, but maintained his outperform rating.
This was followed by Bernstein analyst Toni Sacconaghi, who trimmed his target from $800 to $750 while cutting FY 2013 estimates from $50.57 to $49.41 per share, citing slower growth. Then Citi issued a hold rating with $575 price target, citing rising iPhone and tablet competition from Google and Microsoft.
Clearly, the market has grown more pessimistic about Apple’s ability to grow earnings. However, the popular bear arguments have made little sense. For example, if concerns about margin compression are to be believed, then why is Apple’s iPad mini, which is priced at $130 more than the closest rival are, in such high demand? Apple still can’t make enough of them.
Overblown Concerns About the Competition
Another popular notion was that the company was beginning to lose its edge to Google (NASDAQ: GOOG) – except it’s not true. Apple continues to dominate Google in U.S. smartphone sales – reaching 53.3% market share. This is according to a recent report by Kantar Worldpanel ComTech, which tracks sales data.
Besides, heading into its own Q1 report, Google has to figure out how to reverse its 15% EPS miss in Q3. Not only did its $9.03 earnings per share fall short of estimates, it represented a 7% year-over year decline. What’s more, revenue of $2.6 billion arrived 11% below consensus estimates of $2.94 billion.
And it was all attributable to Motorola, which Google decided was worth a 60% premium. Clearly Google has its own house to clean up. As for Microsoft (NASDAQ: MSFT) being a threat, this couldn’t be farther from the truth. The company has been too slow to adapt to several key growth areas such as mobile, where Apple has rendered Microsoft irrelevant.
Although Microsoft has attempted to take a bite out of the iPad and IOS with the launch Surface and Windows Phone, sales have been dreadful. For that matter, so have PC sales, which were terrible in 2012, including (roughly) -7% in Q4. Plus, it’s going to get worse. Hard to imagine considering the Microsoft’s abysmal Q1 report, during which the company posted net income of $4.47 billion on revenues of $16.01 billion, missing both top and bottom line estimates.
Also, are we really to believe that Microsoft is scaring Apple? Then there’s Research in Motion (NASDAQ: BBRY). Although RIM is starting to gain some traction with BB10 and having sold 7 million BlackBerry phones in its most recent quarter, I don’t think anyone believes it is sustainable – particularly with the company’s recent concerns over services revenue, which is under change.
Nonetheless, some analysts prefer to focus on Apple’s lowered guidance. The only way for RIM to truly gain traction is if Amazon’s (NASDAQ: AMZN) phone ambitions prove true and Amazon chooses RIM’s BB10 for its OS. According to Taiwan Economic News, Amazon will launch the device some time in the second or third quarter.
Interestingly, the report also suggests that the phones will be manufactured by Foxconn. If that names sounds familiar, it should. This is the same company that manufactures Apple’s iPhone. Without going into further details such as subsidies, the report also suggested that Amazon’s phones might sell between $100 to $200. If true, this will not be priced in Apple’s market nor will it be enough to invigorate margin concerns for Apple. It remains to be seen how true this report proves to be.
Wall Street analysts should be ashamed of themselves to suggest that Apple can no longer innovate. Aside from having a fiercely loyal consumer base, the company still provides excellent returns on capital and significant margins. What’s more, that shares are trading at a P/E of 11 -- the stock has now become the cheapest equity on the market. With operating cash flow at over $50 billion, analysts owe Apple an apology for misunderstanding what the company is still about.
rsaintvilus is long AAPL and has no positions in the other stocks mentioned