After Apple's (AAPL) earnings announcement, I visited several news sites to see the reaction on the internet. Interestingly enough, I found more than 10 different websites that used the word "disappointing" in their heading regarding Apple's results. Many reporters argued that Apple's results were disappointing and many went as far as to say that Apple's success story is nearer than ever to its end. Surprisingly, this reminds me of a few quarters ago when Apple didn't beat the arbitrary analyst estimates and everyone jumped in the bandwagon of Apple bashing, until, of course, Apple proved them wrong again and again.
Why Apple's Results Aren't So Bad
Let's take look at Apple's "disappointing" results, shall we? Apple's earnings grew at a rate of 21% in the last quarter compared to the same quarter a year ago. First of all, growth rate above 20% is very impressive for a company that has a P/E ratio in low teens. Most companies with similar P/E ratios would be happy to see a 9-12% growth year on year. Second, Apple posted this growth in an extremely difficult environment. Third, Apple posted 20% growth on top of its strongest year ever up to date. People seem to forget about this fact. Being able to beat one's all high time high year by 20% is nowhere near disappointing.
Currently, a large chunk of the developed nations are either in recession, about to enter in recession or just got out of recession. Many others (for example the US, Germany and France) are struggling hard not to get sucked into recession. The current economic environment is very hostile towards growth companies and Apple is no exception. Even the fastest growing economies like China are experiencing slowing down and many companies feel the pain. Companies in many different industries from Nike (NKE) to Ford (F) reported weak demand for their products outside of North America. Keep in mind that Apple is for the most part a consumer oriented company. I think being able to post 21% annual growth at a time like this is anything but disappointing; it is rather impressive. Apple's products are priced at premium rates and during harsh economic times, companies like Apple are likely to suffer the most. For example, feel free to take a look at how Tiffany (TIF) or Abercrombie Fitch (ANF) have been performing lately. Apple continues to post double digit growth in an economic environment that is known to decimate similar companies.
Also keep in mind that the quarter from March to June is usually the slowest quarter for Apple. Many people buy their electronics during the holiday season, particularly the time between the Thanksgiving and the Christmas. Once the winter season comes, Apple will continue to sell its expensive products as easier than a bakery is able to sell its breads.
Furthermore, many people are waiting on iPhone 5. In US, many mobile phone carriers allow their customers only one upgrade every 18-24 months. Not many people would want to use their upgrade now instead of waiting a few months and getting iPhone 5. Of course, the release date of iPhone 5 is not confirmed at the moment; however, I would be really surprised if it didn't come out in a matter of months.
Moreover, there are still many countries and regions where Apple has a huge fan base but no stores. For example, Turkey, Europe's fastest growing economy, is yet to have an Apple store. It's one of the top 10 countries where iPhone applications are being downloaded. There are also regions in China, Japan, South Korea and India without Apple Stores. Basically, Apple has a lot of room to grow as it can easily double the number of its stores without having demand problems.
Given all these, Apple's results are not disappointing. If anything, they are impressive. The company saw 84% year on year sales growth in iPads, generating revenue of $9.2 billion. Keep in mind that iPads are available in less than 20 countries as we speak. As Apple introduces its tablet to more markets, it will bring in more revenues for the company. In addition to revenues at the point of sale, the tablets can generate additional revenues as Apple sells content such as movies, e-books and music through iTunes. In addition to the iPads, the company saw 28% year on year growth in iPhones. This didn't impress the analysts as they were expecting a higher number; however, it impresses me given the economic conditions we are in today. The company didn't see growth in Macs or iPods but this is not much of a concern as these two products don't make up a large portion of the company's overall revenue.
Reaction of Apple's Management
Apple's management was not alarmed at all by the results, neither am I. During the conference call, the company's CEO Tim Cook answered a question regarding the competition in the tablet market by saying: "We've all seen many different tablets, hundreds of them come to market over the last year and I have yet to see any of them gain what I would call any level of traction at all. We're going to keep innovating in the space and keep making great products." Unfortunately, Mr. Cook didn't give any details about what those products are and when they are coming. One of Apple's biggest strengths is the element of surprise. I am sure the company has all kinds of surprises for consumers in the future.
The Analyst Reaction
I think that the analysts are more worried about getting the numbers wrong than Apple missing their estimates. Many analysts will probably lower their estimates for the future quarters in order to appear more conservative, helping Apple crash those estimates like it did many times before.
Launching New Products?
On a cautionary note, Apple needs to release iPhone 5 this fall before it's too late. If the new iPhone doesn't hit the stores prior to the Thanksgiving, many Apple fans might be tempted to try out products of the competition such as Samsung's Galaxy III. This fall, a number of new phones from a number of manufacturers will be introduced in the market as Windows 8 (MSFT) will be released, and Apple surely doesn't want to lose any market share during the holiday shopping season. I am sure the management of Apple knows this fact far better than I do, and I am sure they have a plan in store. In fact, it wouldn't surprise me if the company announced another product like iTV at around the same time as iPhone 5.
On Apple's Future Guidance
This is pretty much the only thing that made me upset in Apple's earnings report. It looks like, the next quarter will be a little worse than the last. The company expects to earn $7.65 a share in the next quarter. This is a much lower figure than the $10 predicted by many analysts. Apple usually gives conservative forecasts and the company is known to be tight-lipped about future catalysts to its stock price. In addition, the low guidance might be a sign that the company will not launch any new products in the next 3 months. Apple might be preparing to launch new products right after this current quarter and this may be why it expects lower activity during this quarter. After all, the company has acknowledged that consumers were anticipating a new iPhone however it kept quiet regarding accuracy of such anticipation.
Still, I'm a long term investor and lowered short-term guidance figures don't bother me. It would be very wrong to interpret Apple's lowered guidance for the next quarter as if the company's growth story came to an end. The company will be selling less iPhones than once anticipated, and its growth in iPad will not be enough to make up for the difference. Of course, the decreased sales growth for iPhones does not mean that consumers don't like this product anymore. This doesn't mean that Apple's consumers are switching to other phone brands either. Apple enjoys an incredible level of consumer loyalty and it has millions of fans anxiously waiting for iPhone 5. Until iPhone 5 is launched, the company's margins will continue to contract slightly as the iPad and older iPhones will not enjoy the margin a new iPhone would. Still, keep in mind that Apple's margins are much higher than the industry average, and even if they fall some in the short term, there is nothing to worry for the long term investors.
Unfortunately, Apple didn't provide a full-year guidance as it never does. If it provided a full-year guidance, we could look at the company's estimate of the holiday season and this would give a hint about future Apple products. For example, if the full-year guidance included a 100% revenue growth rate for the holiday season, it would be safe to estimate that Apple will launch a new product during or before the holiday season. As for analysts, they predict that Apple will earn between $13 and $18 per share during this holiday season. The consensus is nearly $16 per share. Many analysts expect a new product to be launched in that quarter.
If Apple launches iPhone 5 and a new TV in addition to introducing iPad to the new markets by October, it can easily earn $18-19 per share during the holiday season. Apple's production partner Foxconn already admitted that a TV was soon to be in production. The margins in the new products will continue to be as high as Apple enjoys a brand name strong enough to ask for premium pricing on its products. What if Apple doesn't launch new products by October? In that case, Apple bears may be right for another quarter as the demand for Apple's existing products will be on the decline, but I find it extremely unlikely to happen. I am almost certain that Apple will launch new products this fall and it will see results even better than those in the last holiday season.
In conclusion, I don't agree with those saying that Apple's growth story is over. I disagree with those thinking that Apple's "American Dream" is coming to an end. The same people made the same arguments a couple quarters ago, and they were wrong. Apple's growth story is intact despite the strong challenges in the global economy. Can you imagine where Apple will be once the global economy takes off again? I can't…