Back in April, a day before Apple (NASDAQ:AAPL) reported first-quarter results, I told investors to avoid buying shares of the tech icon. Boy did I immediately look stupid. The next day, the company reported a blowout quarter. And shares instantly vaulted 9% higher.
Subscriber, Michael L., took the opportunity to ping me with a nice note, saying, “Eating crow yet, Louis? I usually like your analysis, but I think you’re all wrong on Apple.” You know what, Michael? Sometimes vindication takes, well, time. And my implied time horizon was a wee bit longer than one day. So I’m not ready to eat crow just yet. Especially after Apple’s latest earnings report.
As The Wall Street Journal’s Ben Levisohn (another Apple pessimist) summed up, “If [Apple keeps] posting earnings like this, we may not look so stupid after all.” Preach on, brother!
Big Swing and a Miss!
After yesterday’s closing bell, Apple reported fiscal third-quarter earnings. The result? Apple whiffed hard enough that the fans in the bleacher seats could feel it …
- The company sold 26 million iPhones for the quarter. Analysts expected sales of 28.4 million units.
- It reported revenue of $35 billion. Analysts expected $37.2 billion.
- And it booked $8.82 billion in profit – or $9.32 a share. Analysts expected $10.37 a share.
Keep in mind, Apple has a penchant for underpredicting and overdelivering. In fact, over the last 25 quarters, Apple’s only missed earnings expectations once. We can make that twice now. Apparently, newbie CEO, Tim Cook, didn’t get the memo about managing Wall Street expectations.
Even if we chalk up this quarter’s disappointment to Mr. Cook’s learning curve, however, Apple’s results still fail to inspire confidence. True, sales and profits rose 23% and 21% over the last quarter, respectively – growth most companies would kill for. But we’re talking about Apple here. Investors have come to expect much stronger growth.
As I warned previously, though, Apple’s growth is, indeed, slowing. Just take a look at the year-over-year growth rates for sales and earnings. They’re heading down, not up!
Notice the spike in Apple’s fiscal first quarter, which can be attributed to the launch of the iPhone 4S in October 2011. The company sold a record amount that quarter (37.04 million units). Therein lies another key concern regarding Apple. The company (and by extension, the stock) is increasingly driven by hit devices. Apple readily admits it, too.
CFO, Peter Oppenheimer, said speculation about a new device “has caused some pause” in sales. As a result, management expects sales and earnings for the next quarter to drop to about $34 billion and $7.65 a share, respectively. Analysts were previously expecting sales and earnings of $38 billion and $10.27 a share. Again … whiff!
iPod, iPhone, iPad… What’s Next?
Now, there are two ways to respond to the reality of Apple’s hit-driven business. First, there’s the stupid way – advocated by analysts, including Piper Jaffray’s Gene Munster. He says, “We’re gonna get the big lift in the December quarter when the iPhone 5 does come out… This is clearly the largest product cycle in the history of mankind coming here and you’ve got to own it ahead of that. You’ve got to buy it on the bad news and today is a big opportunity.” Put more simply: Apple is a “Buy” at any price. The company can do no wrong.
Then there’s the smart way – advocated, of course, by yours truly. This entails trading Apple cautiously. Or more specifically, if you own shares already, tighten up your trailing stop. If you don’t own shares already, don’t bother buying them. Why? Because Apple’s become a two-hit wonder.
iPhone and iPad sales now account for 72% of revenue, up from 65% last quarter. So the only way for its stock to keep climbing, especially when it’s bumping up against the law of large numbers, is for Apple to keep introducing new product categories. Then it must instantly dominate those new markets.
Or as North Shore Asset Management’s Michael Obuchowski, says, “Pressure is mounting … Because everybody else has a much faster design cycle, Apple has to come up with a new phone that’s competitive not just when it comes out, but will stay competitive for a long period of time. That’s going to be increasingly difficult.”
I’d say so. Especially since competition is already heating up. For instance, Microsoft’s (NASDAQ:MSFT) about to start selling its Surface tablet, and Google (NASDAQ:GOOG) just introduced its Nexus 7 tablet.
Bottom line: Investing in hit-driven industries is a risky proposition. Just ask shareholders of videogame makers like Electronic Arts (NASDAQ:EA). Companies have to keep developing more blockbusters. When they don’t, stock prices tumble.
When it comes to Apple, if the visionary Steve Jobs was still at the helm, I’d be willing to bet that Apple would keep on innovating. But he’s not. So I stand by my previous conviction: “An investment in Apple right now carries much more downside risk than upside reward potential.”