IT Earnings: A Rocky Road Ahead

Includes: AAPL, STX, XLK
by: Stock Traders Daily

Without two stocks included, the Information technology sector reported EPS growth of only 0.53%. Those two stocks were Apple (NASDAQ: AAPL), and Seagate (NYSE:STX). Given the recent happenings, the earnings going forward for the IT sector might look much worse than they have recently. Seagate had a 56.8% increase in revenue and a 760% increase in EPS in the second quarter of 2011, leading the IT sector, but much of that was from sales made to Apple.

For Apple specifically, I have warned about increased competition, the inability to continue to innovate, and future margin pressures. Today I have more to talk about, but the tail does not wag the dog. When major executives leave a Silicon Valley company they usually do it because they found a better opportunity somewhere else. Another way of looking at it is that the opportunities at Apple were no longer good enough. That means these executives see what I see. Apple had an amazing run, but Apple has made some bad decisions recently and they are losing traction. This is exactly what I warned about months ago.

It doesn't matter who you are, how big your company is, or the reputation you had yesterday, when you sell into a consumer market you are subject to the fickle nature of consumers themselves. Just like the shortsighted view of the market, consumers are all about what you did for me lately. In this particular instance many of the consumers of Apple products that I talk to have a reason to be disgruntled. The maps issue and the restriction on YouTube are just the tip of the iceberg, because many people feel as if Apple will soon try to monopolize everything, restrict their access to some of the best things, and no matter how cool a product looks anyone who feels restricted will not feel comfortable.

Of course, changes can be made, restrictions can be lifted, improvements can come, but the fickle nature of the consumer when coupled with high levels of competition make it very hard to maintain the growth rate Apple has realized unless the company offers a product that is cutting edge, and almost perfect. I would further argue that the company needs to be operating in a similar fashion as well in order to maintain that growth rate, but from what we are seeing key executives are leaving and the competition is fierce while product setbacks exist. The combination of these three elements presents a situation for Apple that could eventually be defined as a turning point for the company. In the consumer space, all they need to do is open the door and the competition will come running in, and Apple seems to have just opened that door.

What I was saying before is now transpiring, Apple is not the same company it once was, and like I have been in many other ways, I was a little early here as well, but I am not wrong. Apple is facing serious challenges, it is not the company that it was, continuing to innovate at the same rate or even close to that previous rate is extremely unlikely, and the growth rate of the company will likely decline substantially going forward.

I would be particularly concerned about both Apple and Seagate going forward because without these two companies the information technology sector in the second quarter earnings season only grew by 0.53%. If Apple and Seagate (which was directly influenced by Apple) start to feel the pressure, technology as a group is going to get hit. That means, beware of XLK (NYSE: XLK) too. There are better ways to make money in this market.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.