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A New Mature Apple Emerges; Is It Too Late?

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

On Wednesday, I could only shake my head in disgust, watching shares of Apple (NASDAQ: AAPL) plummet after-hours. It made absolutely no sense. And it served as my reminder for how irrational and grossly absurd the stock market can be sometimes.

Hated rival Google (NASDAQ: GOOG) posted a mere profit growth of 5% and the stock soars 6%. Meanwhile, Apple posts 13.5% profit growth and the stock tanks. Not to mention Google was already trading at twice the P/E of Apple. It’s sheer lunacy. But then again, this sort of folly should surprise no one.

The Quarter That Was

First, let’s get something straight – despite what the subsequent 10% drop in the stock might suggest, Apple’s Q1 results were not even close to being horrible. I was nonetheless reminded that the company was no longer being led by magicians. And this was precisely the message the company wanted to send.

At first, disappointment set in. It has become clear that management can no longer live up to the pressure of pulling rabbits out of hats. Steve Jobs is no longer there to do it. This is not by any means an indictment on the company. However, there was no other conclusion to draw when Apple’s CFO, Peter Oppenheimer described the company’s change to how it issues guidance:

"In the past we provided a single point estimate that was conservative. This quarter and going forward, we are going to provide a range of guidance that we're likely to report within."

Basically, the company is saying that going forward when it issues guidance it will be “more realistic” and not the “low-ball” variety that it has been known to provide. And in the long term, I think this is very important as it will greatly benefit the company.

Essentially, Apple is making an appeal to the Street and to the investor community to therefore be more realistic in their projections and expectations. The company realizes that it is no longer miles ahead of everyone else. Though it is still the leader, the gap is closing. And this was evident in the numbers.

Revenue arrived at $54.5 billion, which was in line with Street estimate, but possibly softer depending on which data point used -- consensus was roughly $54.58 billion. Apple beat EPS estimates – posting $13.81 versus $13.34 per share. Investors were displeased with the iPhone unit number. Buy side analysts were looking for 50 million, Apple posted 47.8 million.

However, it’s worth pointing out that part of Apple’s revenue weakness has to do (in part) with Q1 being shorter this year than last year. This year had only 13 weeks versus last year’s Q1, which had 14. This is not meant as an excuse, but it should be considered when factoring sales performance. But it didn’t help.

Investors then panicked when margins arrived at 38.6% -- sending the stock into a frenzy. However, margins came in line with Street estimates. And to be fair, while margin compression was one of the most popular cited bear arguments, Apple’s performance should be viewed as a positive since it beat its own prior guidance of 36%.

The Competition is Proving Capable

However, analysts chose to focus on the fact that it dropped more than 600 basis points year-over-year from 44.7%. Again, Samsung has not made it easy. Still, I was a little surprised by the soft iPhone unit sales. I was on record in saying Apple would beat the 50 million unit number especially since Apple had overtaken Google in U.S. smartphone sales – reaching 53.3% market share.

However, today it is Google that deserves the applause – especially with revenues rising 36% year-over-year to $14.42 billion. The company beat on revenue by over $2 billion. This is despite prolonged struggles with average cost per click, which fell 6% year-over-year, marking the fifth consecutive quarterly drop. This is the amount of money advertisers pay to Google for ads.

For Google, this is a nice improvement over Q3 when it missed EPS estimates by 15%. So clearly the tide is beginning to shift between the two bitter rivals. But they operate differently. And Google has not shown to be taking a bite out of Apple’s device sales. Microsoft (NASDAQ: MSFT) is presumed to be doing this. But its numbers say differently.

Microsoft’s attempts with the launch of Surface and Windows Phone 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.

Microsoft remains too slow to adapt to several key growth areas to be considered a legitimate threat to Apple. However, Research in Motion (NASDAQ: BBRY) is no longer the long shot that it was presumed to be. Although I don’t consider RIM the death knell to Apple, a RIM/Amazon union can prove effective.

For instance, if Amazon (NASDAQ: AMZN) launches a phone this year as has been the rumor, all bets are off if Amazon chooses RIM’s BB10 for its OS. And reports suggest that the phone may be out by the second or third quarter of this year. Interestingly, Foxconn is rumored to be the manufacturer. This is the same company that makes the iPhones for Apple. In terms of threat to the iPhone, it all depends on how Amazon prices the phones.

However, should Amazon choose to go with RIM’s BB10, it could impact the growth of both iOS and Android. Essentially, Amazon would be taking out two rivals with one decision. Meanwhile, this helps RIM immensely since it is starting to gain some traction after having sold 7 million BlackBerry phones in its most recent quarter.

Bottom Line

While I never believed Apple was playing a game with the market, it is clear that the company is now taking a more serious position with its reports. In the same sense, the company realizes that it can no longer just get out of bed to 30% growth each day. There’s work to be done and the competition is on its heels. That Apple guided Q2 margins lower to a range of 37.5% and 38.5% proves this.

However, with $137 billion in cash, the fundamentals have not changed. The question is, where is the stock going? And what will be the catalysts to reverse this slide? Disappointingly, no new revelations were made. While I remain confident that the company will turn things around, the days of glossy-eyed expectations are gone. It’s a new Apple and therefore new expectations. But I’m struggling to set some at the moment.

rsaintvilus is long AAPL and has no position in the other stocks mentioned

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