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Apple’s Profits Are Flat, and Stock Drops Apple’s Profits Are Flat, and Stock Drops
(about 3 hours later)
While it would take a crowbar to pry iPhones and iPads out of the hands of their fans, investors have been falling out of love lately with the company that makes them. Apple on Wednesday reported the kind of quarter most big companies would envy, posting a profit of $13.1 billion and selling 28 percent more iPhones and 48 percent more iPads, its two biggest products.
On Wednesday, Apple did not appear to provide a strong enough reason for investors to warm to it again. It said its profits were flat because of higher manufacturing costs, even as revenue rose 18 percent. The results exceeded analysts’ profit forecasts and just missed their revenue estimates. Its stock quickly sank 11 percent.
Apple said revenue from the iPhone jumped 28 percent during the crucial holiday shopping season, when the company’s products fly off store shelves like they do at no other time of the year. What is going on? Because of its great success in recent years, many investors have come to expect nothing short of perfection from Apple. And while it is still widely considered the most innovative company in the technology world, a maker of products that its devoted customers cannot live without, Apple is facing a range of challenges.
The results arrived with an unusual level of anticipation, even for a company as high-profile as Apple, because of anxiety among some investors about Apple’s ability to sustain its growth and create new hit products. Apple’s stock has lost about a quarter of its value since September, erasing more than $170 billion of its market value. It is dealing with increased competition from big rivals like Samsung and Google, and with so many people already using smartphones, the market is not quite as untapped as it once was. Apple is forging into cheaper product categories, meaning lower profit margins. And given that Apple has grown so big, with sales of more than $160 billion in the last 12 months, keeping up its heady growth rate is becoming harder and harder.
The results sent Apple’s stock tumbling 10 percent during after-hours trading. Once-euphoric investors, who pushed Apple’s stock to a record high of $702.10 last September, have become nervous, and in after-hours trading on Wednesday, the stock traded at $461.30, down 34 percent from its peak.
Apple said its net income for its fiscal first quarter ending Dec. 29 was $13.1 billion, or $13.81 a share, compared with $13.1 billion, or $13.87 a share, in the same period a year earlier. Apple has reinvented itself several times over the last decade with groundbreaking new products, and could do so again. Television and electronic payments are among the markets where analysts believe the company could make a serious push, leading it to new heights.
The company’s revenue was $54.5 billion, up from $46.33 billion a year ago. “Apple has really been able to invent whole new markets,” said John Gallaugher, an associate professor at Boston College’s Carroll School of Management. “That’s where it differs from companies like Microsoft. I don’t think the mojo of this team has evaporated.”
Those results compared to the average earnings estimate of $13.44 and average revenue estimate of $54.73 billion from analysts surveyed by Thomson Reuters. Apple itself had previously told Wall Street to expect earnings of $11.75 a share and revenue of $52 billion, though the company has a long history of low-balling its own financial forecasts — which are then ignored by analysts. In a conference call with analysts, Timothy D. Cook, Apple’s chief executive, said the company’s pipeline of new products was “chock-full.”
“Sentiment has turned super-pessimistic on Apple, where they’ve gone from being able to do no wrong to suddenly being able to do no right,” said Rob Cihra, an analyst at Evercore Partners. “I tend to think the company’s momentum is a heck of a lot more solid than people are concerned about.” “We feel great about what we have in store,” he said, without adding details.
In the meantime, though, the love affair that investors once had with Apple is clearly waning.
“There’s nothing that can help the stock from sliding now,” said Mark Moskowitz, an analyst at J. P. Morgan Securities, who said Apple’s holiday sales met his own forecasts, even though they missed others’ predictions.
For years, Apple has offered an unusual alchemy: it was not only a large, highly profitable tech company, but one with the rapid growth rate of a start-up. It pulled this off under the leadership of Steven P. Jobs, its former chief executive who died in late 2011. He had a startling knack for finding new multibillion-dollar opportunities for Apple with the iPod, iPhone and iPad, but his death has accentuated concerns about the company’s prospects.
A big part of Apple’s challenge is that it is now so large that it seems unrealistic, mathematically, for the company to continue finding new pots of gold big enough to maintain its growth. In a recent research report, A. M. Sacconaghi, an analyst at Bernstein Research, calculated that were Apple to grow for the next five years at the same rate as the last five years, its revenue would be $1.2 trillion, or about the size of Australia’s gross domestic product.
Mr. Sacconaghi said in an interview that technology companies often enter a phase of “growth purgatory” as they shift to a slower lane. Their stocks can tumble by 25 percent or more.
“This transition is often very messy,” he said.
On Wednesday, Apple did not appear to provide a strong enough reason for investors to warm to it again. It said its profits were flat because of higher manufacturing costs, even as revenue rose 18 percent.
Apple’s net income for its fiscal first quarter ending Dec. 29 was $13.1 billion, or $13.81 a share, compared with $13.1 billion, or $13.87 a share, in the same period a year earlier. Revenue was $54.5 billion, up from $46.33 billion a year ago. Those results compared to the average estimates of $13.44 a share earnings and revenue of $54.73 billion from analysts surveyed by Thomson Reuters.
Apple’s growth in the quarter looked positively anemic compared with the huge numbers it used to deliver. For the holiday quarter of 2011, in contrast, its revenue jumped 73 percent and its profit soared 118 percent.
In its financial forecasts for the current quarter, Apple provided numbers that suggest a decline of roughly 20 percent in earnings a share, according to Mr. Sacconaghi’s calculations.
A number of analysts say they still believe the company’s good times are not over. “Sentiment has turned super-pessimistic on Apple, where they’ve gone from being able to do no wrong to suddenly being able to do no right,” said Rob Cihra, an analyst at Evercore Partners. “I tend to think the company’s momentum is a heck of a lot more solid than people are concerned about.”
Mr. Cihra said Apple’s iPhone and iPad sales missed some of the most optimistic forecasts, but “all in, it was a pretty darned good quarter.”Mr. Cihra said Apple’s iPhone and iPad sales missed some of the most optimistic forecasts, but “all in, it was a pretty darned good quarter.”
One factor that hurt comparisons between Apple’s most recent holiday quarter and the prior one was that its 2012 quarter was a week shorter. One factor that hurt comparisons between Apple’s most recent holiday quarter and the previous one was that its 2012 quarter was a week shorter.
Analysts were especially worried, headed into the holiday quarter, about Apple’s profit margins, which the company had warned would decline as a result of a near total overhaul of the company’s product line. Apple said new products do not yield profits during their earliest days that are as juicy as when the company is manufacturing them in bigger volumes. Headed into the holiday quarter, analysts were especially worried about Apple’s profit margins, which the company had warned would decline as a result of a near total overhaul of the company’s product line.
While new products are a routine thing for a company like Apple, it said the sheer number of new gadgets it released just before or during the holidays, including the iPhone 5, iPad Mini and new Mac computers, was unusual. While new products are routine for a company like Apple, it said the sheer number of devices it released around the holidays, including the iPhone 5, iPad Mini and new Mac computers, was unusual.
But negative sentiment around Apple has further hardened amid reports that the company had cut orders for components with some of its parts suppliers, potentially suggesting weak demand for the iPhone. But negative sentiment has further hardened amid reports that Apple had cut orders for components with a supplier, potentially suggesting weak demand for the iPhone.
Mr. Cook cautioned that investors shouldn’t place too much significance on such reports because Apple often gets its parts from multiple sources.
“I would suggest that it’s good to question the accuracy of any rumor about our build plans,” he said.