Apple Inc. (NASDAQ: AAPL) has not gotten the warm reception from Wall Street and investors that the fan boys may have hoped for after its quarterly earnings report. The long and short of the matter is that Apple’s maturity has crept up on it, and the days of Apple shares rising indefinitely are looking more and more like the are in the past.
24/7 Wall St. has compiled a list of reasons that the stock is not rallying after earnings. We would caution investors that the drop was only 0.7% in the late morning trading on Tuesday (see updated closing price below). This “negative reaction” is one more of caution rather than a call that things are about to go from less-good to atrocious.
Some issues are hurting Apple, others are merely perception. We would even argue that perhaps some issues may be overblown when you consider that Apple became the greatest growth story of this generation. Apple’s past decade may be the greatest growth story ever.
Some issues are earnings, cash use, margins, market share, industry trends and the like. These are the details of 10 serious overhanging issues that are hurting Apple’s post-earnings stock reaction. Outside of the earnings per share (EPS) issue, they are not ranked in any specific order.
1. Declining Earnings. We may not have an order on the rest of things, but a decline in earnings has to stand out as serious trouble. Sales are barely growing, yet Apple’s EPS was reported as $8.26, versus $8.67 a year ago. Even if the number was ahead of the $7.93 consensus EPS estimate, it is a disappointing trend when you consider that Apple is buying back stock as well.
2. A Cash Bubble Peak. Apple’s cash balance added up to $147 billion at the end of the quarter, but this was barely higher than last quarter because of buybacks and dividend payments. Investors will worry that the “peak cash” has been seen. Even with $9.9 billion in cash flow from operations, the cash balance hardly grew.
3. Gross Margin. Apple’s gross margin remains under pressure. This was shown to be 37% in the most recent quarter, versus 36.9% in the prior quarter, which was at the high end of the prior guidance. As Apple keeps shifting to overseas and lower-priced products, it keeps having to sacrifice on margin. Gross margin a year ago was almost 43%.
4. International Pain vs. Gain. Apple is becoming more international each and every quarter. You could almost argue that the company has a drug company aspect, because higher product prices in the United States just are not as common overseas. As mentioned above, this helps to drive down margins. This past quarter appears to be a high, with 60% of revenue being from international sales.
5. The Buyback Dud. Apple may have spent $7.8 billion buying back stock in the past quarter, but activist Carl Icahn is calling for more. Icahn wants a $150 billion accelerated share buyback, but Tim Cook pushed out a decision on a buyback increase (capital allocation plan) until the first quarter of 2014.
6. A Tim Cook Discount. This is going to sound unfair, and we admit that it is, but the reality is that Cook is just not anywhere close to Steve Jobs when it comes to a CEO premium. He does not bring the same excitement, does not convey the same confidence, and seems to have less urgency than Jobs. Before you knock Cook down too much, consider this: no one else is Steve Jobs either. Cook is probably a stellar CEO by another measurement than comparing him to Jobs.
7. Share Price Alone. Apple shares are basically flat on the year’s stock performance, despite a gain of well over 20% for the S&P 500 Index. The stock is down from the 2012 peak of $705, but it has recovered handily since the 2013 lows. April 17, 2013, was the first day of the sub-$400 stock price, and the stock rose 32% from that point going into earnings, and they were up almost 37% from the 52-week low. Some investors simply are locking in great profits, which means selling pressure.
8. Analyst Lethargy. R.W. Baird was the sole analyst upgrade we have seen, to Outperform from Neutral. The rest of the analyst calls felt merely like a slow telegraph of a slightly more positive bias. Some price target hikes might even be considered a huge disappointment to the true Apple fan boys. Were there some yawns in there from those Wall Street analysts?
9. Declining iPhone Market Share. Apple just recently was shown by Strategy Analytics to have a declining market share in its iPhones. This market share was down to 13.4% from 15.6% a year ago as newer and cheaper competing phones grab interest globally. With the new iPhones, this has to be an ongoing concern.
10. Macs Are Now Just PCs. Apple may have done something to itself that is sad to see. By creating the explosive iPad and tablet market, Apple may have turned the Mac merely into a PC as well. These are high-margin unit sales, but the most recent quarter’s Mac sales were 4.6 million, versus 4.9 million in the year-ago quarter. This is called cannibalization, something we worried about from the start of this effort. Great iPads can be bought for $600 (or less) while great Macs will sell for multiples of that.
The reality is that you can go on and on about how and why Apple shares are selling off. Apple is a maturing story, even if it will continue to launch great new products ahead. You can argue either way that shares will rise or that shares will fall in the weeks and months ahead. That is what makes a ball game.
UPDATE FOR CLOSE: Apple shares closed down 2.5% for a loss of $13.20 to close at $516.88 on Tuesday.
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