5 Numbers Giving Apple Bulls Fits

Apple's (NASDAQ: AAPL  ) in trouble.

The stock has given back nearly a year's worth of gains after its third consecutive disappointing quarter.

I'll admit it. As hard as I have been on Apple lately, I didn't think it would crater today. The stock had fallen so sharply ahead of the report -- off nearly 30% since its all-time peak four months ago -- that I figured Mr. Market would take the lower earnings and margin contraction in stride.

It didn't.

This is a dangerous time to be long or short Apple. Both sides may have it wrong.

Bears are shouting "I told you so" at a time when Apple's stock is trading at historically low levels. Bulls are arguing that this is the mother of all buying opportunities, but didn't they say the same thing last week -- and the week before?

In order to understand why Apple got here and to gauge where it may be heading, it's important to take a sobering look at some of the numbers in last night's problematic report.

Let's dive right in.

This may actually be the scariest number in Apple's report. Apple's gross margin fell from 44.7% a year ago to 38.6% during this holiday quarter.

Apple's move to offer the cheaper iPad Mini and shave as much as $200 off the consumer-facing price of older iPhone models helped prop up sales -- revenue rose 18% despite Apple having one fewer week this reporting period -- but it came at the expense of Apple's ability to mark up its products.

This may not change anytime soon. As Apple faces a glut of cheaper Google Android products and developers are left with little choice but to support both mobile operating systems, Apple can't afford its premiums.

Verizon (NYSE: VZ  ) told investors this week that its wireless margin will improve. The only way that will happen is if Apple negotiates lower subsidies or if Verizon Wireless sells more Android devices. Apple knows the danger of ignoring the mass market. Its Mac computers were fringe high-end products for too long. Apple's going to gun for market share over margins, and it's why Apple's outlook for the current quarter calls for gross margin to clock in between 37.5% and 38.5% -- slipping again, sequentially.

4.1 million
Apple sold just 4.1 million Macs. This is pretty surprising. It sold 5.2 million Macs during the prior year's holiday quarter. It even sold 4.9 million Macs during its most recent September quarter.

Supply was a problem. Apple's suppliers are surprisingly inept lately. However, it's also clear that consumers are no longer upgrading PCs the way that they used to. Wasn't it just a matter of time? The cloud computing revolution has made it less necessary to upgrade older desktops and laptops. This is brutal for longtime nemesis Microsoft, since the software giant has far more to lose in this paradigm shift.

Apple's cool with the cloud. It's perfectly fine with the "good enough" computing revolution that's favoring smartphones and tablets -- markets where Apple has greater sway than PCs -- over actual computers.

However, it's still a scary-low number. What happened to the "halo effect" that would lead to all Apple sales thriving if one of them was a hit?

75 million
Apple points out that it sold more than 75 million iOS products during the holiday quarter. That's a lot of iPhones, iPads, and iPod touch devices. However, at the end of the day, it didn't necessarily make a lot more money on the bottom line.

Apple's net income was essentially flat during the quarter, though profitability would've inched higher if Apple had an extra week to provide a fair comparison to the prior year's 14-week quarter.

At its low today, Apple's stock yielded a record high 2.35%. We can call it a record because Apple initiated its payout policy just last year.

Shouldn't it be higher?

It has to be disappointing to see Apple not react to its poorly received report by not jacking up its dividend to woo income investors. Apple's CFO said during yesterday's call that Apple is committed to returning $45 billion to shareholders over the next three years. Now would've been a good time to loosen up on those purse strings.

$94 billion
Value hounds will point to Apple's $137 billion in cash and marketable securities, but let's not assume that it's exactly available -- and don't you dare make the mistake of subtracting that from Apple's market cap to arrive at a ridiculously low earnings multiple on an enterprise value basis.

A whopping $94 billion of that is parked overseas. Apple can't touch it unless it's willing to pay hefty repatriation taxes.

In other words, objects in Apple's balance sheet mirror may be smaller than they appear.

One more number
There's no doubt that Apple is at the center of technology's largest revolution ever, and that longtime shareholders have been handsomely rewarded with over 1,000% gains. However, there is a debate raging as to whether Apple remains a buy. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on both reasons to buy and reasons to sell Apple, and what opportunities are left for the company (and more importantly, your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.

Read/Post Comments (5) | Recommend This Article (14)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 24, 2013, at 6:41 PM, TheDumbMoney wrote:

    If I subtract 35% of the cash (to account for taxes), and model 2% income growth out into the future, with a WACC of 10%, I derive a value of around $551 for the shares. Seems really cheap. But of course, it's possible AAPL in fact sees declining earnings. After all, it did in this yoy period, as you note, and gave fairly weak guidance for next quarter as well.

    The interesting thing though is that MSFT's earnings numbers have been even worse, yet it arguably (I say arguably b/c it does have a higher yield) trades at a higher valuation than AAPL does. And MSFT has the added albotross of Ballmer's abysmal track record on acquisitions and attempted acquisitions, and will probably end up writing off billions more for Skype (I'd love to know what mark-to-market would say about the true value of Skype even now). That'll happen, just as they had to write off billions for that ad company. So it's kind of amazing to me that MSFT trades more richly than AAPL.

    What really seems to be case is that the market is thinking that GOOG and maybe even AMZN are eventually going to vanquish or at least severely harm both of these companies, notwithstanding that so much of the narrative has historically been about MSFT vs. AAPL.

    Interesting times.

  • Report this Comment On January 24, 2013, at 7:02 PM, Jbpdx wrote:

    New iMacs were in short supply during the fall quarter. Many people postponed buying. Watch for iMac sales to bounce back in this quarter.

  • Report this Comment On January 26, 2013, at 1:42 PM, hightimes1 wrote:

    Hard to imagine that there are too many Apple bulls left. I figured that most have been converted to Apple steers, by now.

  • Report this Comment On January 27, 2013, at 6:48 PM, earlyseller2 wrote:

    Not having been directly acquainted with Adam & Eve, I guess that today's healthy dieters have taken more than their share of bites of the apple and are physically better off. Unless the loss of financial eggs all in one basket has affected their health & wealth. Perhaps they need to 3D print a few more opportunities in the market of stocks; including Whole Foods and Starbux while watching Netflix soar back to streaming success. Unless they pine for an IMAX version of ZipCar Teslas racing across the screen. Of course, Apple TV may blow us all away with embedded terabyte DVRs and Blue Tooth WiFi Internet interfaces with SIRI input/response dabblers.

    After my fifty years of working with computers, you can just punch my 5081 cards to print in color on an IBM 1403 chain printer; decades after Navy Captain Grace Hopper coined the term "computer bug" as that Philadelphia moth short circuited two contact points on the vacuum tubed ENIAC at U of P in the late 1940s. I.E. Things change and toasted bagels are still good with Philadelphia cream cheese; carbs & all.

  • Report this Comment On February 01, 2013, at 1:14 PM, ruastar2b wrote:

    Isn't it interesting that when analysts predict Apple's Earnings and they are wrong, they say that Apple "missed" the target. Apple didn't miss - the analysts missed! These so-called experts arrogantly make predictions and then they blame Apple rather than themselves for the "miss." Why anyone listens to these guys is beyond me.

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