5 reasons Apple's drop won't last

Shares sink after a rare earnings miss, but the dip will be a mere bump in the road.

By TheStreet Staff Oct 19, 2011 11:20AM

By James Rogers, TheStreetTheStreet

Apple (AAPL) sent shock waves through Silicon Valley when the company reported a rare miss after markets closed on Tuesday, falling short of the consensus profit view for just the third time since 2002.


Investors were shaken by the fourth-quarter numbers, particularly the gadget maker's weaker-than-anticipated iPhone sales, pushing Apple's stock down by as much as 5% in early trading Wednesday.


The fourth-quarter results, however, should be little more than a bump in the road for Apple and its new CEO, Tim Cook, who stepped up to replace his iconic predecessor, Steve Jobs, in August.


"Not every quarter is a blowout," explained Charles Wolfe, an analyst at Needham & Co., noting that, outside of the iPhone slowdown, Apple's other fourth-quarter metrics were strong.

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Read on for three reasons Apple's stock dip won't last:


1. Strong outlook. Sure, Apple's iPhone numbers came in below Wall Street's projections, but the fourth quarter is history now. Instead, investors should focus on the company's better-than-usual first-quarter outlook.


Apple projected earnings of about $9.30 a share and revenue of roughly $37 billion. The current consensus view is for earnings of $9.01 a share and sales of $36.72 billion.


During Apple's last fiscal first quarter, the company brought in $26.74 billion and earned $6.43 a share, so the tech giant is clearly heading in the right direction.


"As consensus estimates are now likely to hug guidance more closely, we expect next quarter's expectations to remain realistic, and perhaps even conservative, explained Bill Shope, an analyst at Goldman Sachs (GS).


2. IPhone rebound. Apple looks set to reap the benefits of consumers delaying their iPhone purchases ahead of the launch of the company's latest phone. With demand for the new iPhone 4S already breaking records, the stage is set for some big first-quarter numbers.


"We believe demand remains very strong for the iPhone, as evidenced by the record iPhone 4S launch of 4 million units sold in the first three days of availability," explained Michael Walkley, an analyst at Canaccord Genuity. "Despite this transitional quarter, we continue to anticipate strong earnings growth for Apple with record sales during the December quarter."


"While iPhone 4 sales clearly paused ahead of the new iPhone rollout, the blowout iPhone 4S demand leaves little doubt in our mind that Apple is poised for another blockbuster iPhone product," added Brian White, an analyst at Ticonderoga Securities.


3. New cash strategy? Cook, as expected, faced questions on the company's ever-expanding cash haul, now at a mind-boggling $81.6 billion. As expected, the new CEO was quizzed by analysts on whether he would consider carving up some of that cash, possibly in the form of a dividend or a share buyback. Apple stopped paying a dividend in 1995, preferring to instead focus on "strategic opportunities."


During the call, Cook hinted that while the money "isn't burning a hole" in Apple's pocket, he could be open to revisiting the company's cash strategy.

"I'm not religious about holding cash or not holding it," he said. "We will continue to ask ourselves what's in Apple's best interest -- it's a topic for the board on an ongoing basis."


"We felt Tim Cook's commentary regarding the potential to return some of Apple's cash to shareholders was more open than in recent memory, potentially setting up a stock buyback or cash dividend over the next 12-18 months," noted Ticonderoga's White.


4. Fourth-quarter positives.  Lost in all the wailing and gnashing of teeth that followed Apple's fourth-quarter results were some key numbers that bode well for the tech giant.


Apple, for example, set new all-time quarterly records for iPad and Mac sales. The company shipped a massive 11.1 million iPads, thanks largely to the iPad 2, up from just 4.2 million iPads in the prior year's quarter.


Mac sales were also robust, with Apple shipping 4.89 million Macs, compared to 3.89 million in the same period last year. Apple's Mac numbers were boosted by the launch of the new MacBook Air, as well continued demand for the MacBook Pro. Macs enjoyed particularly robust growth in Asia-Pacific, according to Apple, where sales were up 61% year over year.


"Apple continued to break records," explained Beau Skonieczny, an analyst at Technology Business Research, in a note. "Triple-digit iPad unit sales and a 37% year-to-year increase in Mac portable shipments drove an overall 39% year-to-year [revenue] growth to $28 billion."


Even Apple's iPhone numbers should be viewed within context. The 17.1 million iPhones sold still represented a September quarter record.


5. Supply chain looks strong. With Apple aiming to get millions of products into the hands of consumers during the busy holiday quarter, the company's supply chain is always critically important, although Cook gave no hints of anticipated problems during the fourth-quarter conference call.


"It's a very positive market from a supply point of view," he said, in response to an analyst's question on component pricing.


Cook, famed as a logistics guru, also explained that Apple will continue to use a select group of suppliers, and is not afraid to spend money on its supply chain. The company, he said, has used its balance sheet "in a favorable way" to do some strategic deals on crucial parts across a series of products.

"Apple will leverage its deep supplier relationships to meet strong holiday demand for the iPhone 4S and drive significant sales in the fourth quarter of 2011," added TBR's Skonieczny. "Apple's strategic relationships with fewer suppliers rather than many allows for more predictability and control over the production process -- Apple will continue to leverage its supplier advantage to meet demand for iPhone 4S through the 2011 holiday season."


Oct 19, 2011 12:44PM
I agree. Apple cannot BE ALLOWED to drop because it is key in keeping this fraud of a stock market propped up.
Oct 19, 2011 2:29PM

The apple market is saturated.  & People are cutting back on unnecessary junk.  Upgrading to the next iPhone is being taken like upgrading to the next windows system.  They'll do it when they're existing iPhone tanks. 


At least that's what I've been observing at work.


Oct 19, 2011 3:27PM
Apple won't tank because people are oblivious to reality. Give it a few days when the big guys clear their extra shares out.

I love how iPhone sales are lower than expected because people are waiting for the next iPhone. So what you are saying is that Apple's competitor is Apple? Did Apple not know that they were releasing a new iPhone? This sums up the real problem with Apple -- they reuse customers and have a really hard time getting new ones.

I would guess that since the Microsoft phone is picking up more than expected, and the iPhone is dropping more than expected, the cause of the drop in sales would be pretty clear. Apple keeps releasing a new phone that is 90% exactly alike the old phone with some more features that are really not even that important (wow, a faster processor. Cool! except the phone doesn't have a program on it to even use the current one) Other phones release updates to add those features while Apple usually, 95% of the time, makes you buy a new phone.

Google has lost their momentum and Apple only has a circle of regular customers. Microsoft has been working on a phone and tablet for a long time. They released the Mango update and it is far better than the iOS and Android OS. There will be more application in a windows phone (I mean real apps like business software) then any other OS. Microsoft will destroy Apple in the tablet market and as a result the iPhone will follow. As soon as the Windows tablets become popular more people will see the advantage of a open company with experience and a huge base of Application developers.

The big difference in the phones is clear when you look through available computer programming jobs you will see Microsoft's ASP.NET languages 10,000 times more than Apples Objective C. It is just like the 90's. Microsoft has experience crushing Apple.

Short term you can play APPL maybe another few quarters, probably less, but the long term play is MSFT. I guess if you think that APPL is going to be able to justify a market share of 1 Trillion dollars based off of a single phone and a tablet it makes sense. The way people are playing this stock they think that Apple will be selling 1 Billion phones a year.

In a few years APPL will be $250/share if they can keep all that money in the bank. Why do you think they won't pay dividends. They need that cash. They only have two products and iPhone and a really big iPhone. Not much of a business plan for a company with the largest market share! Sure they will get those people who love the product and have never tried anything else and never will. That means they will get those big initial sale numbers. It is sustaining the sales when they don't have a new product for 2 years that will kill them. Then it will cost more to make phones because they will make a lower amount. They will have to advertise more and spread the R&D price a little thicker which will cause their profit margin to decrease. Spend more to sell less sounds like a failure to me.

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