Apple stock falls, is Apple too reliant on the iPhone?

Apple’s stock fell in after hours trading following its fiscal third quarter financial results announcement.

The stock closed at $600.92 just before the company announced its financial results for its third fiscal quarter of 2012, but over night it fell as low as $568.80 after-hours trading. A 5% fall.

The reason for the loss of confidence was high hopes for the company’s earnings, and in particular, great expectations for iPhone sales, the company’s biggest product.

Analysts, on average, were expecting Apple to achieve revenue of around $37.2 billion and earnings of $10.37 a share, according to Thomson Reuters. The company announced quarterly revenue of $35.0 billion and quarterly net profit of $8.8 billion, or $9.32 per diluted share. While Apple said revenue rose 22.6% compared to a year earlier, growth was actually down from 59% in the previous quarter.

This is the second time in 39 quarters that Apple has reported results that missed analysts’ profit and revenue expectations. The previous time was for quarter that ended September 2011, and as is the case now, lower than expected iPhone sales were blamed.

And the next quarter doesn’t look any more positive. The company expects to see revenue of $34 billion, and profit of $7.65 a share for the next quarter, ending in September, most likely before the next iPhone is announced.

The results sent shockwaves through the markets, not just in the US, but also in Asia where the Nikkei Stock Average dropped 122.19 points as component manufactures for Apple products faced pressure: Sharp tumbled 10% to Y260; Toshiba fell 7.3%; LG Display dropped 4.8%; Sharp lost 10%; and Hon Hai Precision declined 4.3%.

The reason for the impact is Apple’s status as the largest company by market cap; any decline in Apple stock tends to be amplified, notes CNBC.

CCS Insight analyst John Jackson told The Telegraph: “Apple is in that rarest of all positions where the Street will punish them for anything less than an excess of success.”

Synovus Trust Co senior portfolio manager Daniel Morgan told Bloomburg: “We have become spoiled by Apple and what they have done in the past. It’s just inevitable that you’re going to have some numbers that disappoint people.”

Economic uncertainty

The Apple stock has been attractive to investors because it was considered that, despite the harsh economic climate, Apple made products, such as the iPhone that were so popular that people would buy them regardless. The fall in revenue has raised concerns that this isn’t the case. Although, others suggest that the slowdown is due to the anticipation that Apple will announce a new iPhone in the autumn. 

Whatever the reason for the decline, Apple itself noted the economic situation – specifically in Europe – as a factor in its disappointing results this quarter. Cook did say that the company hadn’t detected “any obvious economic issues” from the US or China, however.

Trader Tim Seymour told CNBC that the repercussions of the lower than expected results due to the economic circumstances could see money managers pulling out of Apple’s stock. He suggested that they might say: “If Apple is not immune (to the malaise) then I’m out of the market. I don’t need to buy anything.”

Regardless of this, Capital Advisors Growth Fund co-manager Channing Smith, seems bullish about Apple’s ability to defy the economy. He told The Telegraph: “Looking forward, obviously the global economy is weakening but history tells us Apple performs very well throughout any type of economic environment.”

Many analysts note the economic environment in their assessment of Apple’s results. Cross Research analyst Shannon Cross told The Telegraph: “It reflects a lot of the economic challenges we’re hearing form a number of players out there, with regard to the strength of the consumer. There’s probably also some currency pressure on the top line. They sell in Europe and the euro has weakened substantially. Given the economic uncertainty they’re probably being cautious about their outlook. They’re still a very strong company. This is still not an expensive stock.”

Alekstra analyst Tero Kuittinen agreed that Europe may have impacted, but also noted the increased competition from Samsung: “European sales dipped by a very surprising 6 percent sequentially. The combination of Samsung’s big roll-outs and suddenly weakening European consumer demand in June created some issues,” he told The Telegraph.  

The iPhone issue

The lower than anticipated iPhone sales is perhaps taking the most blame for Apple’s disappointing results.

A slowdown in iPhone sales is significant because it is Apple’s biggest selling product, bringing in the most revenue for Apple.

Does this suggest that Apple is too reliant on the iPhone?  North Shore Asset Management LLC portfolio manager Michael Obuchowski told Bloomberg “Pressure is mounting. Because everybody else has a much faster design cycle, Apple has to come up with a new phone that’s competitive not just when it comes out, but will stay competitive for a long period of time. That’s going to be increasingly difficult.”

Strategy Analytics executive director Neil Mawston believes the next iPhone is “really critical for Apple,” because other devices are catching up with the iPhone. Apple’s biggest competitor in this market, Samsung has already eclipsed Apple in smartphone shipments in the first quarter of this year. Samsung achieved a 29% market share compared to Apple’s 23%.

Mawston also told Bloomberg that the next iPhone will have to be compatible with the latest fourth-generation wireless technology. This may cause problems, because there are various standards of 4G around the world. For example, the iPad uses a variety of 4G that is only compatible with the US network and doesn’t work anywhere else.

The next quarter is also likely to be disappointing as we are unlikely to see a new iPhone before the end of September when the next quarter finishes. However, analysts have high hopes for the October, November, December quarter (always a good one for Apple). Virtus chief market strategist Joe Terranova said: “I’m looking forward to the December quarter and then the March quarter. In December I expect to hear iPhone sales are north of 50 million – an historic high.”

Capital Advisors Growth Fund’s Channing Smith agrees that once Apple launches the next iPhone matters will improve. He said: “We expected a lot of consumers will probably delay their upgrade and their purchases until the iPhone 5 comes out. So I’m not too worried at this point.”

CCS Insight analyst John Jackson added: “If there’s a positive spin on the iPhone story, it is one of latent demand. The broad consumer market is sufficiently tuned in at this point to expect something in the fall, so the shortfall is really consistent with what you would expect. As expected, Apple continues to defend and extend its leadership in the tablet space – a space it essentially invented and continues to own” he told The Telegraph.

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