With all of the fanfare that technology giant Apple (AAPL) has received over the past couple of days for (what I call) its "shot heard around the world" earnings report, it now seems that this euphoric event has had some side effects. While the reason for investor jubilation is more than justified, Apple's performance, however, has set the bar so high that it has taken away from performances that (before Tuesday) the market thought were good. These include a stunning fortune reversal from the likes of Bank of America (BAC) which turned in a surprise profit as having reported a loss from a year ago.
Just How Ridiculous Is Apple?
Well, for starters, it is now the world's largest company and it seems that the only thing that can top Apple's recent quarter is its next one, and possibly the one after that. But this is where things get a bit dangerous. At what point do we then start expecting the impossible? On Tuesday, Apple reported net income of $13.1 billion, or $13.87 per share, compared with net income of $6 billion, or $6.43 per share, for the same period the previous year. The company's iPhone sales come in at more than 37 million and profit more than doubled for its latest quarter, surging past analysts' estimates. Revenue jumped 73% to $46.3 billion.
Analysts were expecting earnings of $10.08 per share on revenue of $38.85 billion for the quarter, according to consensus forecasts from Thomson Reuters. The company said it shipped 37.04 million iPhones for the quarter - a number that surpassed the average analysts' forecast for just more than 30 million units sold. In a call with analysts, Apple CEO Tim Cook said the company made a "very bold bet" with its manufacturing targets for the iPhone 4S, but still came up short on supply amid heavy demand for the device.
Its Effect on the Market
With being the world's No. 1 company and just having ended (arguably) the best quarter for any corporation of all time, everything else on the market that follows not only will be second billing but they always fall short of the marquee. So far, Apple's report was a standout in what has really been a disappointing earnings season as only 57% of the companies that have reported have beaten forecasts - this compares with the 70% mark of recent past.
However, with such a strong showing, the term "halo-effect" is thrown around - which implies, Apple's success may spill over to other companies. This is something to which I happen to subscribe and feel that its effect can be significant. Since there is always two sides to every story, let's look at some companies that stand to suffer due to Apple's dominance.
Research In Motion (RIMM)
Research In Motion is the biggest no-brainer here. It stands to reason that since the company has been in a death spiral as Apple commenced its ascent, it will likely maintain such status as Apple's supremacy grows. The question for RIM is, how much downside risk does the company still have considering that performance expectations are so low? With the hiring of a new CEO, the company has bought itself a little bit of time while it sorts things out. However, it doesn't seem as if it will be much of a difference from the old regime.
Will the company be able to execute in the manner that it needs to in order to convince shareholders that it has what it takes to perform a resurrection to the extent of that of Apple at the beginning of 2001? That too remains to be seen. One of its advantages is that it still has a big stronghold in the enterprise. Along with Mobile Fusion, the company should seek to scale down some of its operations by discontinuing legacy platforms and commit to offering strictly enterprise business services, but its execution has to be precise and its investors have to forget the past. But regardless of how it performs from here on out, it is hard to consider that the space is remotely big enough for any potential success that it may have and that of Apple's. Unlike the competition in other sectors where there is clearly enough room for two rivals such as Sirius XM (SIRI) and terrestrial radio. However in RIM's space, the race is clearly over.
As with Apple, Amazon has become successful in disrupting the way we buy our products and the way that we enjoy them. The Kindle Fire is one such example and I have to think that its creation was motivated by Apple and the iPad's dominance. For as brilliant of a CEO that Jeff Bezos is, it is undeniable that Apple forced him to enter the tablet race - one where the pursuit has proven to not be as laughable as the other carnage left behind by Apple such as the aforementioned RIM. But as with RIM, some companies are just unable to keep up or essentially always playing catch-up.
Clearly Amazon deserves more respect than this, but with that respect comes the acknowledgement from Apple that they are indeed a formidable opponent. For all of the early success of the Kindle Fire, Apple is only a "large version of the iPod touch" away from extinguishing the euphoria over the $200 tablet. But Amazon will not go down easy. It has shown not only that it has the ability to execute but it is also keen on its evolution into untapped growth areas. But regardless of its execution prowess, it goes without saying that it is hard to pass a leader, when you're always playing from behind.
Whenever any company's bread and butter is spelled with the two letters "PC," it is a clear sign that any success for Apple will come at its expense. This is the predicament in which tech giants DELL and Hewlett Packard find themselves. Dell in particular cannot afford any more share loss though it has been widely known that its PC sales have been on a steady decline for the past two years. In its most recent quarter, the company reported net revenue that was essentially flat, at $15.4 billion, and consisted of a 2% drop in product sales.
Beyond services, the remaining segments of its business posted negative growth, with the largest declines in storage and desktop PCs, which fell 15% and 6%, respectively. It's the results of the desktop PCs and storage units that tell how critical this situation may become as it was already one of the poorest performers of its business.
Hewlett Packard (HPQ)
Hewlett Packard is another company that cannot afford hiccups of any kind since it is now just warming up to its new CEO in Meg Whitman. During its Q4 2011 earnings announcement, the company did a decent job of assuring investors of its new future and a possible restoration of prominence, but there was also evidence that it is still suffering from poor execution and lack if investment spending. It reported Q4 non-GAAP net revenue of $32.3 billion, down 3% from the same quarter in 2010.
The company posted non-GAAP diluted earnings per share of $1.17. Analysts expected HP to post earnings of $1.13 a share on revenue of $32.05 billion. The company had indicated plans to focus heavily and inject capital into its PC division as well as its IT services business which includes boosting research spending and limiting the size of acquisitions. This is a far stretch from the company's previous strategy that involved neglecting some of its key assets. How much of its internal investments it will be able to recover remains to be seen. But it certainly does not look promising for anyone in Apple's space. Oh, and by the way, it's still trying to push its TouchPad tablet. Your guess is as good as mine as to why.