24th January 2013
What goes up must go down as Isaac Newton almost said but should that really have applied to Apple’s share price this week?
Given that profits were steady at around $13.1bn and the firm sold more iPhones, at around 47.8 million and iPads of 22.9 million in the final three months of 2012 than in any previous quarter, was it really gravity making its presence felt or something altogether more human such as the hangover after a classic bout of investors’ irrational exuberance?
The shares fell 12 per cent on Thursday and have slipped massively since highs last year of just over $700 to just above $450 a share.
The move has seen analysts demanding more market changing products or suggesting that rather simply target the top end to consider developing products for the mainstream (and mainstream wallets).
Mindful Money is not in the business of share tipping but we suggest investors consider three things. First it is always difficult to stay at number one in any market. Second perhaps the profile of Apple is changing and maybe at this stage in its corporate life it needs to change anyway for example by increasing its dividend and its appeal as an income stock.
Third Apple was clearly over-valued when it was hitting the dizzy heights of $700. It is easy to say that with hindsight but plenty of people said it at the time too. Take all three together, and it is clear that even a world beater can be overvalued and that growth, particularly spectacular growth, is not always the best and certainly not the only reason to buy a company’s shares.
However technology fund managers do believe that there are several problems with the results and with the firm’s strategy related below in a note from Walter Price, lead manager of RCM Technology Trust.
He says: “Apple’s report was certainly disappointing. Although gross margins were 38.6 per cent versus guidance of 36 per cent, unit shipments were disappointing in every category. Investors were thinking Apple would ship 49-50 million iPhones after the fast start and an influx of new subscribers from Verizon, but in the end only 47.9 million iPhones have been shipped. The number of iPads was 22.9 million versus the initial 24 million estimate, and the Mac at 4.1 million was certainly a big miss. EPS was also not a beat and at $13.81 was down from $13.87 last year.”
He also suggests that Apple has set itself some very ambitious targets.
“Our view is that the March guidance is not the usual conservative guidance that we have come to expect from Apple’s Chief Financial Officer. The indicated shipment targets of about 15 million iPads and 38 million iPhones will not be easy to hit. The prevailing idea from the last call that margins were likely to improve as the company moved down the experience curve for its new products was eventually discarded as margins were guided to be between 37.5 per cent and 38.5 per cent. We think that is realistic but it means that earnings will decline in the next quarter. The result was a decline in the stock in the aftermarket.
Possibly more of a concern is that Apple has not woken up to the competitive threat.
“A bigger issue for us is that Apple did not seem to acknowledge its problems and its market share loss to Samsung and Android. In our view, Apple needs more models, especially a wider phone, and they need to acknowledge that their margins are unsustainably high. It looks as if 2013 will likely be a difficult year for Apple.
“Fortunately, the news for many technology stocks so far in the earnings season has been better than three months ago. For example, yesterday IBM said that its business has stabilized, and Google said that pricing for mobile ads is not as negative a factor as it has been. Today, Netflix had good subscriber growth and a profit. All of those stocks have rallied after their reports so we are finding other opportunities within the sector.”
A few other interesting links
Ft.com reports on falls in tech-linked exchange traded funds despite general market rises though that is not much of a surprise given the high proportion that Apple makes up of the Nasdaq and linked funds.
Meanwhile just before the results in what must be the tech row of the week Forbes magazine’s contributor Peter Cohan sets out why Apple boss Tim Cook is doing so badly – variously legal fights with Samsung, a near saturated market, rising costs as working conditions have had to improve in its production partners’ factories in China and, also in China, a reluctance among the Chinese to pay for premium products.
He suggests why the board should replace Cook with product design partner Jony Ive because it is only in that way that Apple can start to design new market revolutionising products in the Steve Jobs’ mould.
One can almost feel the internet-enabled mobile devices bristle with indignation as Computer World’s Jonny Evans retorts taking on Cohan’s arguments point by point, highlighting Apple’s extremely high margins, the ease and willingness of its customers to sell on old versions and trade up for the latest model and the huge popularity of the phones in China. And in terms of Ive, Evans even questions the ‘Steve Job’s myth’ – that he did it all rather than rely on his team. In fact, he argues Jobs relied on Tim Cook who has on and off been chief executive for several years.
All true but as angry former Apple bulls look for scapegoats, Cook may start to hope opinions like Evans’ prevail rather than those of Cohan.