At this stage, many Apple Inc. (NASDAQ:AAPL)
investors are feeling a combination of anger and confusion due to the market´s brutal reaction to the company´s earnings report, falling by more than 10% to $460 on Thursday morning—a loss of nearly 35% from September’s highs.
But before you panic and make a regrettable move, like selling your Apple Inc. (NASDAQ:AAPL
) shares or setting an Apple store on fire, there are some comforting things to consider. Put the torch down and don´t rush into the panic selling spree; it´s not as bad as it seems.
To begin with, let me rephrase the headlines you are seeing everywhere else right now: Apple Inc. (NASDAQ:AAPL
) didn´t miss, it was analysts who missed their estimates. Apple usually downplays guidance, so everyone expects better numbers that what the company projects, but this is still a useful distinction to keep in mind.
Apple Inc. (NASDAQ:AAPL
) reported much better numbers than what it told the markets to expect. But analysts, knowing that the company is famously conservative in its guidance, had higher expectations.
In fact, Apple reported better than estimated earnings per share at $13.81 versus $13.44 expected by analysts on average. Sales were a little below expectations though; the company reported $54.51 billion in revenue versus 54.73 billion expected by Wall Street Analysts.
Revenue growth was 18% annually for the quarter, but if we consider that last year included an extra week, adjusted revenue growth would have been 27%. Earnings per share increased by an adjusted 7% annually. Lower margins were already expected due to new product launches, both gross and operating margins were above estimates.
Looking at the two biggest product lines: iPhone sales increased by a 29% annually - below most estimates- while iPads showed a strong increase of more than 48%. Macs and iPods are being displaced by the iPad and the iPhone respectively, so sales of these products fell during the quarter.
Looking at the post earnings reaction, we could have thought the company was about to go broke soon, but that´s clearly not the case after analyzing the numbers. Apple Inc. (NASDAQ:AAPL
) is still expanding at a healthy rate, the company generated more than $23.4 billion in operating cash flow and now has more than $130 billion in cash and cash equivalents on its balance sheet.
So, why is the stock pluming?
Speculating About the Speculation of Others
"The fact that people will be full of greed, fear, or folly is predictable. The sequence is not predictable."
It´s hard to tell why other people decide to buy or sell a stock; many traders – as opposed to investors- are basing their decision on short term price momentum, and this accelerates stock movements, both to the upside and the downside. Everyone sells because everyone else is selling, and they look for reasons – excuses – after pulling the trigger.
The most popular argument on a fundamental basis seems to be something in the lines of: “growth is slowing, and Apple will never go back to the ultra-high growth years when the iPhone was in its initial growth phase”.
This is probably true: even if the iPad continues selling like crazy and Apple launches new and successful products, the iPhone was a very special product. Carriers subsidize most of the price in the US, so Apple gets to sell an expensively high margin product and consumers don´t feel the pain in their pockets that much. That´s a fantastic combination for growth and profitability.