Investors and analysts can't seem to decide whether Apple just gave them good news or bad news.
Apple's stock has been on a roller coaster ride since the company released its March earnings report shortly after the market closed on Tuesday. At first, the stock shot up by more than 5%, but as the earnings call got under way, it started to trickle back down. Just before the market opened Wednesday, the stock was down more than 3% -- a swing of nearly $40 per share in about 17 hours.
As I write this, the stock is hovering right around the $400 mark and bouncing back and forth between positive and negative for the day. That reaction might seem odd given the first wave of headlines after the earnings report came out, which billed it as a strong beat for the company. Indeed, it was good on the whole, with Apple reporting better-than-expected revenue, earnings and sales of the iPhone and iPad -- much better sales of the iPad, in fact, than analysts had anticipated.
However, it's important to remember that expectations were low to begin with. For years, Apple consistently put forward very low estimates -- or what Wall Street refers to as "guidance" -- for what it would accomplish in the quarter to come. This, in turn, helped Apple to consistently crush its own estimates. But during the December earnings call, Apple's CFO revealed that it would now issue guidance that "reflects our belief of what we're likely to achieve." Analysts appeared to get the message and adjusted their estimates for the company accordingly, so it really shouldn't come as too much of a surprise that Apple met or slightly exceeded estimates for the quarter.
If you do look past those categories where Apple beat expectations, there are a few troubling points in the earnings report and the call that followed, which may be worrying investors and analysts.
Profit Decline
For the first time in a decade, Apple's profits-per-share declined year over year from $12.30 in the March quarter of 2012 to $10.09 in the March quarter this year. Likewise, Apple's gross margin declined to 37.5% from 47.4% in the year-ago quarter. That would be troubling for any company, but a big part of the reason Apple was the apple of Wall Street's eye was precisely because it routinely boasted large profits.
CEO Tim Cook acknowledged that this was an issue at the beginning of Apple's earnings call: "Though we’ve achieved incredible scale and financial success, we acknowledge that our growth rate has slowed and our margins have decreased from the exceptionally high level we experienced in 2012."
Much of this, the company admitted, was due to increasing demand for products that are sold closer to cost, like the iPad Mini. That is only like to continue in the quarters to come.
Weak Outlook for the June Quarter
In its guidance for the June quarter to come, Apple estimated that it would report revenue of between $33.5 billion-$35.5 billion with a gross margin of between 36%-37%. According to BTIG analyst Walter Piecyk, that could represent a 20%-30% decline in profits-per-share to just $6.50-$7.50. It might also represent a drop in revenue year-over-year from the $35 billion that Apple reported in the third quarter of 2012.
To put it another way, Apple now in the process of managing its decline rather than growing again.
No New Products
Apple reinforced this impression by hinting that there would be no new products released until sometime this fall.
"Our teams are hard at work on some amazing new hardware, software and services we can't wait to introduce this fall and throughout 2014," Cook said during the earnings call.
That might be acceptable if Apple were coming off of a robust period of rolling out products, but it has already been more than six months since Apple last held a major launch event -- for the iPad Mini in late October. If Apple really does wait until the fall, it will have been nearly a year since Apple put out anything new.
Losing Market Share
In the meantime, it appears that Apple is losing market share in both the tablet and smartphone markets. With the latter in particular, Apple revealed that iPhone sales increased by just 7% year-over-year (compared to double or triple-digit growth in the past) while a report from IDC said smartphone shipments overall increased by 30%.
Cook acknowledged this as well in response to a question during the earning's call. "I take your point, if the market did grow by 30% we still after that, normalization, we grew less than that and so I think the question or the point is not lost," he said. "And we do want to grow faster. We don’t view it, however, as the only measure of our health."
Perhaps to deflect attention from some of these underlying problems, Apple announced that it now plans to give back $100 bilion to shareholders in the form of buybacks and dividends, a move that one would assume to boost enthusiasm for the stock. But if Apple's current share trading activity is any indication, it looks like money can't buy Apple love -- only new products can.