You don't find too many companies reporting a 70% surge in quarterly net income and then have shares tumble in after-hours trading. Yet that is exactly what happened to Apple (Nasdaq: AAPL) after its highly anticipated earnings release this week. All I can figure is Apple, through no fault of its own, was priced for perfect, and Mr. Market assumed nothing could go wrong.

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Still Solid
Overall, the quarter was quite impressive for Apple. For the third quarter, ended September 25, Apple earned over $20 billion in revenues and profits of $4.3 billion, or $4.64 per share. To give you an idea of how impressive that was, analysts were pegging revenue of $18.9 billion and EPS of $4.06 a share. However, Apple seems to have a hand in greatly beating estimates, since it also tends to guide lower. The company's own guidance for the third quarter was $18 billion in revenue and EPS of $3.44, respectively.

If you think product enthusiasm is fading for Apple, think again. The company sold 3.89 million Macs, up 27% from a year ago. iPhone unit sales were 14.1 million, an increase of 91% from the year ago quarter. iPod sales were down 11%, while the company sold 4.2 million iPads. Apple CEO Steve Jobs did not hold back, saying that Apple's record iPhone sales handily beat the "12.1 million phones Blackberry maker Research in Motion (Nasdaq:RIMM) sold in their most recent quarter."

Too Good For Its Own Good
So why the initial selloff after the stellar earnings report? For one, gross margins were down 37% from 42% a year ago. Due to the intense competition in the tech industry, it's always concerning when you see a decline in gross margins, as that can indicate price wars. I wouldn't be too concerned for Apple, but stiff competition certainly doesn't help sales. iPad sales were lighter than some had anticipated but with the Christmas season coming up, I wouldn't take the lighter sales number as a sign of weakness. Remember, it took the iPhone a couple of quarters to really take off.

With shares trading over $300, Apple commands a market cap of nearly $300 billion. The company is now $40 billion short of overtaking Exxon Mobil (NYSE:XOM) as the largest and most valuable company in the world. This is despite the fact that Exxon churns over $300 billion in annual revenues, while Apple's revenues for the year may touch $80 billion. While Apple's fat profit margins of 20% are making net income swell, the expectations for the company are as high as ever. Even though Apple's current P/E of 23 is still below the 27 given to Google (Nasdaq:GOOG) or the 67 P/E ratio given to Amazon (Nasdaq:AMZN), it takes an awful lot of money to move the needle of a $300 billion market cap company.

Wait and See
Despite the selloff, Apple's quarter was fantastic. But the share price does not have to follow the direction of the earnings report. With Apple currently the darling of the tech industry, it may be best to leave it to the unwavering optimists (for now). (For more, see 4 Companies To Watch This Earnings Season.)

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Tickers in this Article: AAPL, RIMM, XOM, GOOG, AMZN

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