Investors’ expectations take bite out of Apple
Despite strong third- quarter revenue growth and profit, firm’s shares fall
Here’s a wee quiz: a company releases quarterly earnings that handily beat analyst estimates, reporting healthy margins, doubledigit percentage year- over- year profit growth and a 35- per- cent increase in sales of its main product. What happens to the share price?
Before you answer, consider that we’re not talking about some flavour du jour startup. The firm in question is a world- beater in its sector, with a history of strong profit growth, a rabidly loyal global customer base and a knack for knocking off competitors, even those who once seemed unbeatable.
You might expect this company’s stock to get a nice little surge. But if the company in question is Apple Inc., and the quarter we’re talking about is the Cupertino, Calif.based tech superpower’s fiscal Q3, you would be wrong. Dead wrong.
Apple’s third- quarter earnings, released Tuesday after markets closed, were strong by any measure, save one: investors’ extremely high expectations.
Within minutes of the release, Apple shares were down eight per cent in after- hours trading, shaving US$ 50 billion off the market cap of the world’s most valuable company, although they bounced back a little on Wednesday from that beating.
Good luck finding much reason for the sell- off in the top- line numbers. The company reported yearoveryear revenue grew 33 per cent to nearly US$ 50 billion; gross margin — a key metric because it gives an indication of production costs versus revenue — came in at 39.7 per cent; and profit rose 39 per cent to US$ 10.7 billion or US$ 1.85 per share.
All those figures beat analysts’ average estimates, but those estimates don’t tell the whole story.
Investors often have their own way of seeing things, hence the socalled “whisper number,” which is the sum of expectations of a broader base.
Of course, this is impossible to quantify, but some try. According to crowdsourcing site WhisperNumber. com’s polling, the whisper number in advance of Apple’s Q3 earnings per share was US$ 1.83, a little above the US$ 1.81 analysts expected.
In other words, the company even beat informal estimates.
So why was Apple punished for such great performance?
Well, there were some nodules of disappointment in the earnings release: iPhone unit sales came in at 47.4 million, lower than some estimates and Apple’s forward guidance for the current quarter called for revenue of no more than US$ 51 billion, short of analyst estimates by about a hundred million dollars.
Concerns over a slowing economy and stock market weakness in China — an important growth market for Apple — also weighed on sentiment. And a reliance on the handset business certainly spooks some observers, who’d like to see better product diversification, and were disappointed that results for the buzzy iWatch were not set off.
Yet even taking into consideration all those factors, it is hard to see a fundamentals- based rationale for the stock’s post- results plunge.
Apple made more money per unit sold in the quarter, and also worked down its inventory.
Part of the after- hours market action might have been the result of noise traders, who buy and sell on good or bad news, or on the basis of pure technical analysis.
In this case, the “bad” news was that forward guidance for the current quarter was a hair short of estimates. For a company with more than US$ 180 billion in sales last fiscal year, some might conclude US$ 100 million here or there is no big deal.
The bigger problem for Apple might simply be the huge expectations investors put on it. The company is a star. It comprises a huge chunk of the Nasdaq’s market cap and is the “boy wonder” of American innovation. It also has a stellar history of beating earnings estimates.
It’s Apple’s fault for being so good.
Like early adopters waiting for the next iPhone iteration or lining up for the iWatch, investors have fallen victim to the need to be wowed. Beating the Street? Growing earnings? Increasing margins? Well, yeah, that’s nice. But hey, we were expecting you to rock our world.
Longer- term investors might see an opportunity in this kind of reaction.
They might look at Apple’s price to-earnings growth ratio of about one, which is less than half that of Microsoft Corp. or Facebook Inc. Or they could point to Apple’s trailing 12- month P/ E of just above 16, and compare it to the S& P 500’ s P/E of 20.6 or the Nasdaq 100’ s 23.2.
Even if Apple had zero earnings per share this quarter — which would not be a good indicator of future prospects, but let’s just pretend — it would still have a lower P/ E at current share prices than the S& P 500 does now.
This is not to suggest Apple is undervalued. But market moves like the one this week don’t always tell the whole story. Longer- term investors might want to pop in the ear buds and tune out the noise.