Long-time shareholders of Apple Inc. (NasdaqGS: AAPL) have certainly profited handsomely from their investment. The stock soared 385% over the five years between September 21, 2007, and September 21, 2012, when it closed at an all-time high of over $700.00.
During that time, mostly under the guidance of former CEO Steve Jobs, Apple unleashed wave after wave of revolutionary products, including the iPad tablet computer and the iPhone, which came to dominate the smartphone market, crushing competitors like the Research in Motion (NasdaqGS: RIMM) BlackBerry along the way.
However, Apple shares have come under pressure since September on concerns about rising competition, particularly from devices powered by Google’s (NasqaqGS: GOOG) Android operating system. These worries were fueled by reports that Apple had cut its orders of iPhone components due to waning demand. Since its September peak, Apple has fallen 27%, to $514 at the end of yesterday’s session—though it has continued to fall sharply after the company released its latest earnings report after the closing bell.
Apple Shares Sell Off on Flat Profits, Disappointing Sales
The company’s revenue came in slightly short of expectations, and earnings were basically flat, marking the first time in years that Apple hadn’t posted double-digit profit gains. It also forecast lower-than-expected revenue for the current quarter.
In its fiscal 2013 first quarter, Apple’s sales rose 17.7%, to a record $54.5 billion from $46.3 billion a year ago. Despite the gain, the latest figure missed the consensus forecast of $55 billion.
Net income rose just 0.2%, to $13.08 billion from $13.06 billion. However, earnings per share fell 0.4%, to $13.81 from $13.87, on more shares outstanding. That was well ahead of the Street’s estimate of $13.48. Also playing a role in the weaker result was the fact that the current quarter was only 13 weeks long, compared to 14 weeks a year ago.
The iPhone and iPad combined to supply 76% of Apple’s revenue in the quarter. iPhone sales hit 47.8 million units, up from 37 million a year ago. iPad sales also jumped, to 22.9 million from 10.7 million. Sales of Mac computers declined to 4.0 million from 5.2 million, as more PC users switch to mobile devices. iPod sales also declined to 12.7 million from 15.4 million. That also reflects an ongoing shift from the iPod to the iPhone, which shares many of the iPod’s features.
Recent Developments at Apple Make It “Wise to Curb Your Enthusiasm”
On November 9, shortly after Apple began to tumble from its peak, Investing Daily’s Jim Fink took a look at what could be ailing the stock. “Let’s not panic,” he advised investors, pointing to the sharp rise in Apple shares in recent years. However, Fink also wrote that it “may be wise to curb your enthusiasm” about the stock. Among his reasons were the following:
- Smartphones using Google’s Android mobile operating system have risen to 75% market share, with Apple iPhones at only 14.9%.
- iPhone customer loyalty has declined for the first time since the device’s introduction in 2007.
- Scott Forstall, the inventor of Apple’s iOS mobile operating system, was unceremoniously fired for refusing to sign Apple CEO Tim Cook’s apology letter concerning the quality problems with Apple Maps software in iOS6. Forstall is widely considered the most innovative thinker at Apple and closest in thought process to the late Steve Jobs. Cook fired Forstall because he wasn’t a team player and Cook wants more collaboration, but collaboration results in uncreative group-think, and Jobs supported geniuses who were jerks (because he was one himself).
China, Television Could Give Apple a Boost
Two other numbers came up on Wednesday night that are worth keeping an eye on: one is the company’s sales in China, which jumped 67.4% from a year ago, to 6.8 billion. There is still considerable room for Apple to increase its smartphone sales in the country: according to IT research firm IDC, smartphone shipments to China are expected to rise 44%, to 300 million units, in 2013.
However, the iPhone is currently an also-ran in China. According to a January 23 Bloomberg article, iPhones represented about 15% of all smartphones sold in the country in the third quarter of 2012. As we wrote in September, Apple is working on remedying that situation by pursuing an agreement with China Mobile, which has over 700 million subscribers, to sell the iPhone on its network. If the company is successful, such a deal would help it rapidly boost sales of the device in the country.
Another factor holding Apple back in China is the iPhone’s relatively high cost. As Bloomberg also points out, despite the country’s rising wealth, most Chinese consumers still earn an average of $577 a month. That puts even the cheapest iPhone that Apple sells in China, at $495, out of reach for many. However, if the company is currently working on a cheaper version of the device, as has been rumored, that would also help it attract more users in China.
The other key figure wasn’t in the report itself but was mentioned by Cook in the conference call: in the latest quarter, sales of the Apple TV set-top box rose to over 2 million units, up sharply from 1.4 million a year ago. That’s small next to Apple’s other products, but it added to speculation that the company’s next groundbreaking device could be its own TV set (Cook referred to television as “an area of intense interest” on the call). There is still lots of opportunity for Apple to bring its focus on usability to the TV world, as Forbes.com contributor Anthony Wing Kosner pointed out in a January 13 article:
“Navigating the contemporary TV environment, with its 1,200 channels, some premium, some pay-per-view, on top of the ‘over the top’ options like Netflix, Amazon and Hulu—not to mention Apple’s own offerings, is so cumbersome compared to the experience users have on their iPhones and iPads.”
Huge Cash Pile Keeps Growing
Despite Apple’s recent struggles, it still has a number of key assets that will help it attract new users and introduce innovative devices. For one, it has the second most powerful brand in the world, according to a recent report from market research firm Interbrand, trailing only Coca-Cola (NYSE: KO). That gives Apple a crucial advantage when expanding in new markets like China.
In addition, despite its recent decision to initiate a dividend and a share buyback program, Apple’s legendary cash hoard continues to grow. The company ended the quarter with $137 billion in cash, up from $121 billion at the end of September.
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