Tuesday, Apple (AAPL) released earnings, and as I predicted in my article: "Quit Whining About Tim Cook," Tim Cook had a few words of wisdom about the rumors that have prompted Apple's 40 percent decline, and was prepared with a positive surprise, a $50 billion buyback coupled with words of confidence about Apple's future. Although Apple did beat analysts expectations, and had a "big" positive surprise up its sleeve, its stock fell immediately following the "small" negative statement "hinting new products would not be coming until the fall. (August - September)
We are hard at work on amazing new hardware, software and services that we can't wait to introduce this fall and throughout 2014. (Tim Cook)
Some have attributed the fall to disappointment over Apple's guidance for next quarter, that may fall 15-20 percentage points below current analyst expectations. If this is true, it further confirms that Apple investors are too focused on the near term. If Apple investors are selling because they fear nothing new will be released during Q3, and therefore Apple will disappoint, they are ignoring the "big picture," that as Tim Cook has pointed out, requires a little bit of patience.
A $50 billion buyback is a big deal
During the conference call, Tim Cook announced that he is very confident in Apple's future performance, and growth and would be increasing its buyback program by 50 billion dollars, decreasing the current share count at $400 by almost 13 percent.
We believe so strongly that repurchasing our shares represents an attractive use of our capital that we have dedicated the vast majority of the increase in our capital return program to share repurchases. (Tim Cook)
Apple investors ignored Apple's clear, and unmistakable confidence about the future, and instead focused on the expectations they had for the present. Investors want Apple to release "new variants" of the iPhone due to "fears" that Apple is losing market share to Samsung, and are not patient enough to wait an extra month. Apple made more money than any other company in the planet, confirmed "new categories" are coming, and demonstrated confidence in the future of the company by initiating the largest buyback in history, and investors weren't satisfied. Rather than assuming Apple knows what it is doing, and is working hard to release "new products," investors are disappointed that Apple isn't meeting deadlines set by investor expectations.
Apple's stock is not pricing in the future
Rater than investing based on the facts told to us by Tim Cook, the CEO of Apple, who knows the truth about what's coming later in the year, investors chose to interpret this "delay" of a new iPhone as a "negative," and sell the stock. Reporters, and pundits felt inclined to jump on this "logic," and describe the conference call as a "disappointment," expressing concerns over Apple's declining margins, and market share. This perspective demonstrates Apple investors and the media are beyond "short sighted" about Apple's performance. Not only are people focusing too much on individual data points, they are missing the "big picture" that only requires looking ahead a few months. Investors should let Apple do its job, and stop trying to pressure Tim Cook to speed things up. The day Apple kowtows to investors pressure, and rushes a product release, is the day I sell my Apple stock.
Rather than trusting Apple's reliable history of knowing what it is doing, the assumption is being made that Apple is incompetent without Steve Jobs, and has no idea how to innovate or make money. Because investors believe Apple doesn't know how to respond to life without Jobs, they are assuming that margins will decline to the level of Samsung, because of a lack of certainty about future margins. This speaks terribly to Apple investors. Investors should invest in a company due to confidence in management, and a belief that the company will continue to grow and prosper. Even though Apple's Gross Margins have declined, Gross Revenue has continued to increase. If Apple's EPS declines due to near-term factors that are beyond its control, such as component costs, or currency fluctuations, investors should look to the future quarters, when said factors won't be present.
"Apple remains very strong, and we will continue to do what we do best. We can't control items such as exchange rates and world economies, and even certain cost pressures, but the most important objective for Apple will always be creating innovative products. And that is directly within our control. " (Tim Cook)
If we expect that a larger and cheaper iPhone is coming, we should invest based on the assumptions that Apple's market share, and revenue will continue to increase, outweighing any decline in gross margins. Apple sold more iPhones and iPads than analysts expected, reporting EPS higher than analysts had expected, but Gross Margins fell a bit short. Apple investors should view the earnings report as a "positive." There was nothing in the quarterly report that spelled doom, and Apple confirmed a number of "positive facts" that dispelled a number of the "negative rumors" that have caused the stock to fall.