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Apple earnings disappointed investors, with shares of the technology giant falling over 8% in after-hours trading.
While the stock recovered some of those losses in today’s trading session, shares of Apple stock remain well below yesterday’s closing price of around $550 per share. After opening today around $508 per share, the stock has spent much of today’s trading session trading around or below $510 per share.
As the world’s largest technology company, Apple commands a total market value of over $450 billion. So to see moves in the stock as large as 8%, we know that significant amounts of money are flowing between buyers and sellers.
Apple stock remains one of the most actively traded and followed in the market today.
So what was it about the earnings announcement that led investors to push Apple stock lower by over 8%? Here are the three main reasons that Apple earnings disappointed investors.
1) iPhone sales failed to impress
If I had to point to one main reason it would be the iPhone sales results. This was supposed to be a big quarter for the iPhone, with both the iPhone 5s and 5c launching in late September 2013.
Earlier reports that Apple had slowed or even stopped production of the iPhone 5c suggested that the phone wasn’t selling as well as expected. Sure enough, the 5c appears to have been a bit of a dud.
Considering that iPhone represents about 58% of Apple’s revenues and more than 60% of profits, iPhone sales results are one of the most important metrics for Apple investors to follow.
With median analyst estimates for iPhone sales averaging around 55 million, the market was clearly disappointed by Apple’s results of 51 million iPhones sold in the quarter.
The major disappointment for Apple stock is that analysts were looking for 4 million additional iPhone sales, not unreasonable considering the hype around the launch of Apple’s iPhone 5s.
Still, the actual results of 51 million iPhones sold represents a 6.8% growth in sales during the same quarter in the previous year. Not terrible.
Moving forward, expect Apple to revise its iPhone lineup. The current product lineup features the iPhone 5s in the premium position, iPhone 5c as the mid-priced option, and the iPhone 4s as the “low-cost” option.
2) Revenue results and revenue guidance
Also disappointing investors was the revenue guidance offered by Apple.
When a company declares its quarterly earnings it also typically offers an estimate of how much money it will make in the coming quarter. This estimate is typically offered as a range.
Apple has been notorious in the past for “sandbagging,” or giving estimates so low that its actual results come as a very positive surprise for investors, called an “upside surprise.”
In the last few quarters Apple has remained pretty true to its estimates, which is why analysts were disappointed by Apple’s estimates for the next quarter.
While analysts expect approximately $46 billion in revenue, Apple stated that it expects between $42 and $44 billion in revenue next quarter. This disappointment further added to the effects of the disappointing iPhone numbers, sending shares lower.
Perhaps the main reason the low guidance is so concerning is that Apple recently signed a deal with China’s largest mobile phone carrier, China Mobile (NYSE: CHL).
With more customers than there are people in the United States of America, the China Mobile deal has been years in the making and exposes Apple to hundreds of millions of new potential customers. This deal was believed by analysts to be a very big deal and Apple CEO Tim Cook called it a “watershed moment” for Apple.
But with somewhat modest estimates, it remains unclear how big of an impact the China Mobile deal will really have on Apple’s profits.
3) New products? Same promises
For several consecutive quarters Apple CEO Tim Cook has spoken enthusiastically about the “new products” and “new product categories” the company is working on.
And for several consecutive quarters we have seen no new products.
Since the passing of Apple CEO and co-founder Steve Jobs back in October of 2011, Apple hasn’t released any new products.
Sure, the iPhone has been updated, made more powerful and given new features. And yes, the iPad now comes with a retina display, is offered in the iPad Mini form and is now joined by the iPad Air. In fact everything in Apple’s product lineup has been drastically improved.
But when it comes to entering product categories that are brand new for Apple, nothing has happened since the iPad.
For a long time we’ve heard of an Apple TV. These days we’re hearing rumors of an Apple Watch and potential other applications for wearable technology. Meanwhile, connected TVs seem almost like commodity items today and other companies are entering the category of wearable technology. (Read Ian Wyatt’s review of Google Glass!)
On top of the weak revenue guidance and iPhone sales disappointments, Tim Cook used pretty much the same language on yesterday’s conference call that I’ve been hearing quarter after quarter for almost two years now.
If you’re an investor hoping for a bright future of new Apple products, this is disappointing indeed.
Apple Stock: The Bottom Line
Was the Apple earnings report disappointing? In a few key areas, yes. But does it warrant an 8% drop in shares? I think not.
If you like the financial metrics of the company and believe the company can produce new products, there is no reason to change your investment thesis. I personally own shares of Apple and see no reason, based on yesterday’s earnings release, to change my investment thesis.
The company has a great dividend, generates huge amounts of cash flow, is sitting on significant cash and investment reserves, and is rumored to be working on some groundbreaking products.
After such a dramatic fall, this may be a great time to pick up shares of Apple stock. “Buy the dip,” as they say.
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