Apple's Earnings Miss Is Not Surprising

By Sham Gad | August 09, 2012 AAA
Apple's Earnings Miss Is Not Surprising

On July 24, tech titan Apple reported its highly anticipated fiscal third quarter earnings report. Shortly after the market closed, but before Apple reported its numbers, investors began selling off the stock in anticipation of a "weaker" quarter. Apple obliged. Apple reported that it earned a profit of $8.8 billion, or $9.32 per share, on revenue of $35 billion in the quarter, compared with $7.3 billion on revenue of $28.6 billion a year ago. In most cases, that type of growth in this type of economy would be enough to make most analysts drool with excitement, but this is Apple and everyone wants to be dazzled.

Despite the excellent quarter-over-quarter growth, Apple's earnings were below what analysts were expecting. Analysts had expected $9.8 billion in earnings, or $10.37 per share, on revenue of $37.2 billion. The disappointment was enough to shave 5% off Apple's share price.

SEE: A Primer On Investing In The Tech Industry

A Victim of Its Own Success
Apple's earnings miss is perhaps due in part to Apple's own success. I wouldn't use the word cannibalization, but its a predictable pattern when it comes to Apple. The minute rumors surface that Apple is coming out with a new product, in this case the iPhone 5, most consumers defer any future purchases and instead wait for the newest product. Such is the fate of technology today; tech products are changing so quickly that the life cycle of consumer products is very short. This is happening to Apple's iPhone 4. During the third quarter, Apple's iPhone sales plummeted as loyalists wait for the new iPhone. The company sold 26 million iPhones compared with 35 million previous quarter.

The iPhone 5 is rumored to be released perhaps as early as October of this year. If this is true, that suggests that Apple is likely to experience a continued decline in iPhone 4 sales for August and September. That decline could prove to be more severe, since even more consumers will defer purchases as the release date gets closer and closer.

SEE: 5 Must-Have Metrics For Value Investors

Wait and See
For now, investors and analysts will have to take a "wait and see" approach with Apple. Earning may not ramp up again until the company reports its fiscal first quarter results in 2013, as the current quarter is also going to be one without the new iPhone.

As investors wait for Apple, the effect ripples into other companies. Already in trouble, Blackberry maker Research in Motion's shares dropped. Fears of a new iPhone later this year are sure to erode any remaining Blackberry sales, along with the fact that Android phones powered by Google continue to gain market share.

In the meantime, iPad tablet sales are growing rapidly at Apple. The number of iPads sold grew by nearly 50% quarter over quarter from 12 million to over 17 million. Tablet computer sales are expected to surge over the next several years and Apple is expected to hold the lion's share of that market. Many investors today are not known for their patience, especially from an investment standout like Apple. Frustration over the next several months could lead to a further sell-off in shares that may present patient investors with a chance to take a nibble at Apple.

SEE: Earning Forecasts: A Primer

The Bottom Line
Apple's earnings "miss" is only big news because of the lofty expectations the company has created over the past several years. The reality is that Apple, like all technology companies, goes through the natural product cycle where, as products get old, buyers hold off making any purchases in anticipation of the newest iteration. This won't be the last time Apple's earnings don't match expectations, but when the company again unveils the newest iPhone or iPad, consumers are likely to come rushing back.

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