Apple Bulls Aren't Going to Like This

Apple (NASDAQ: AAPL  ) has crossed a line that growth investors probably never saw coming. As analysts continue to whittle away at their profit targets on the tech giant, we can now officially say that Wall Street sees Apple posting lower earnings in fiscal 2013.

We're not just talking about the fiscal second quarter that's coming to a close today. The market's known for months that this would be the first time Apple posts a year-over-year decline in profitability for a quarter since 2003. We're now looking at an entire year of shrinking earnings on a per-share basis.

And I would've gotten away with it, too, if it weren't for those pesky Androids
Some underdog backers may argue that it's not a coincidence that Apple's prognosticators collectively turned within days of BlackBerry's (NASDAQ: BBRY  ) stateside release of the first smartphone running the new BlackBerry 10 mobile operating system.

They're wrong, though. It's not the recent updates in BlackBerry or Windows Phone that are making Apple feel a bit more mortal. It's the growing global appetite for Google's (NASDAQ: GOOGL  ) Android -- and the margins that Apple is willing to sacrifice to make sure that it's not relegated to cranking out a niche product for the well-to-do -- that has Cupertino putting out cheaper iPads and keeping older iPhones around longer at lower price points.

After all, Wall Street still sees top-line growth. Analysts see Apple's revenue climbing 9% for the quarter and 16% for the fiscal year, though those numbers have also been pared back in recent weeks. Apple just isn't being afforded the same generous markups that it has in the past, and that's not going to change until Apple raises the bar of innovation again.

Let's check out how analyst profit estimates for Apple's fiscal 2013 have been scaled back in recent weeks.

Time Period

EPS

90 Days Ago

$48.81

60 Days Ago

$44.84

30 Days Ago

$44.70

7 Days Ago

$44.19

6 Days Ago

$44.12

Source: Yahoo! Finance.

If you think that's swift justice from a pool of dozens of Wall Street modelers, the judgments for fiscal 2014 have fallen even harder. Over the past three months alone, analysts have gone from targeting $57.35 a share to $49.79.

Apple's stock has taken a beating in that time -- down 17% this quarter -- but it's not as if it has gotten that much cheaper as profit estimates have been pared back by 10% for this fiscal year and 13% come fiscal 2014.

The problem with kicking Apple when it's down
It's not just Apple getting the cold shoulder, either. Google, Mr. Softy, and most tech titans have seen their trackers lowering their income outlooks.

The whittling down isn't as pronounced as we're seeing with Apple, but it does defy gravity to see the tech-laden Nasdaq climb 8% during a quarter when most of its key components have seen their profit targets descend.

Apple is one of the few tech bellwethers that's actually cheaper than it was a few months ago, even after accounting for the gloomier near-term prospects. Yet it would be a mistake to assume that this will be the new normal, even if Apple hasn't helped its cause much by coming up short on the bottom line in two of the past three quarters.

After all, Apple isn't stupid. It knows it's out of favor. CEO Tim Cook knows he's a disappointing product launch or a few soft quarters away from facing a torch-carrying mob of people seeking change at the top. The clock is ticking.

In terms of existing products, Apple doesn't have the luxury of taking its time to refresh its product line. The iPhone 5S or iPhone 6 can't come out soon enough -- not because of BlackBerry's Z10 or the Windows-fueled Lumia phones, but because Samsung's Galaxy S4 is going to run away with the market next month, and that's even with its surprisingly stiff contract price of $250.

However, the one thing that will ultimately move Apple shares higher -- and ideally get analysts pushing their profit targets higher the way they used to until the latter half of last year -- is innovation. There's been plenty of debate about the merits of HDTVs, wristwatches, or whatever product category Apple may enter next. Is the market big enough? Can Apple command a healthy enough pricing premium to justify an entry? Will I even need the next Apple toy?

The thing about Apple is that no one knows the answer. The original iPhone did hit the market at a stiff price, but few people outside the corporate realm were buying smartphones at the time. The original iPad made more headlines for its hokey name than for its perceived functionality. Yet Apple went on to redefine one market and define the other.

It will do so again.

Growth-stock investors have moved on when it comes to Apple. They don't accept the margin contraction. The market had no problem pushing Amazon.com (NASDAQ: AMZN  ) to new all-time highs earlier this year, even though its top and bottom lines were diverging. Operating income fell 22% in 2012. Net sales soared 27%. Investors forgive Amazon because they believe that Amazon's accepting near-term pain for long-term gain.

Isn't the same thing playing out at Apple? Instead of accepting that lower margins will be Apple's future, can't the argument be made that Apple's trying to grab market share for an ecosystem that it will radically reinvigorate in the coming months and years?

Apple's down, but it's certainly not out.

Another bite of the Apple
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 more than 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 your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.


Read/Post Comments (20) | Recommend This Article (26)

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 March 31, 2013, at 9:36 AM, DanManners wrote:

    Your article was partly 100% correct and partly 100% wrong. Apple is being destroyed by the endless competiton. But where you are wrong is Apple is down and out for the count. This is TIm Cook running the company not Steve Jobs.

    Apple under Jobs is a mess. Imaps was a disaster. Did someone think of checking the ap before it went out to 100 million or more customers.

    I see the stock trading down below $ 300 after two more earning misses, a disappointing phone and no OMG innovative product.

    Apple will soon be below $ 400 and will never see $ 500 anytime soon or ever. Target prices are entering the sum $400 range and by years end targets will be in the $ 200-$300 range.

    Apple is having lower highs and lower lows. Stay away from this loser. The only great news is that Tim Cook feels your pain.

  • Report this Comment On March 31, 2013, at 10:02 AM, jrogowsk wrote:

    Ignore the rubbish like this Dan guy. Apple is a company that in 1010 had a eps of 15. In 2011 the eps was 27. This surged to the high 40's in 2012. So Apple's eps in 2013 will be in the mid 40's. this is a growth company folks. In terms of technology Apple has the whole picture. Well, they don't have main frames, but you get my idea. HP, MSFT, Samsung, GOOG, etc, all striving to make an echo system similar to Apple. But Apple has it, with an integrated third person software marketplace second to none. Apple is going to continue to grow folks, but a growth from 15 to 40's take time to adjust. Remember, we are investing here.

  • Report this Comment On March 31, 2013, at 10:40 AM, Oril wrote:

    So this Munarriz fool doesn't have a position in any of the stocks mentioned yet his ramblings are dedicated to bashing Blackberry which is now making a comeback at the expense of Apple which he continues to praise in spite of lower lows and lower lows.

    Since he claims to have no stock position he is obviously compensated by someone for writing his crap. Since he has been wrong so often for so long it looks like even this source of income will soon dry up as well. Sad that he has been forced to spend the holiday weekend writing such drivvle.

  • Report this Comment On March 31, 2013, at 11:13 AM, thethreestooges wrote:

    "Longtime Fool contributor Rick Munarriz has no position in any stocks mentioned."

    DUH!

  • Report this Comment On March 31, 2013, at 12:04 PM, coolplace wrote:

    I think if Apple really wanted to spark American buyers "back into the fold" they should bring production home to the US and make it a product "Made in the USA"

  • Report this Comment On March 31, 2013, at 12:06 PM, mshipe101 wrote:

    "The market's known for months that this would be the first time Apple posts a year-over-year decline in profitability for a quarter since 2003."

    This is not necessarily true as Apple reported a net profit of $11.62 billion from $39.186 billion in revenue in Q2 2012 with a gross margin of 47.4%. Although gross margin will be 600-700 basis point lower for Q2 2013, revenue of $45 billion (8% above Apple's guidance - the average for the last 3 Qs) should equal net profit from last year. Apple has begun to demonstrate a cyclical gross margin variation that appears to be a better indicator of projecting their profitability.

  • Report this Comment On March 31, 2013, at 12:37 PM, BTschannen wrote:

    In America, nothing lasts forever. Apple will decline because something new will come out and take over the American consumer's eye. I don't believe Blackberry and Window's phone will be the dagger to finish it off, however I do believe that it is the beginning.

  • Report this Comment On March 31, 2013, at 12:40 PM, DavesHere wrote:

    The question Apple has always struggled with, starting with computers and through pods, pads and phones: "How do we capitalize on what's hot now?" The question Apple has always slammed out of the park: "What's next?" To analyze this company based on its answer to the former misses the whole point of the company. To analyze this company based on the latter may involve some risk, but it is far more appropriate.

  • Report this Comment On March 31, 2013, at 12:42 PM, deasystems wrote:

    The author asserted that, "Samsung's Galaxy S4 is going to run away with the market next month, and that's even with its surprisingly stiff contract price of $250."

    That remains to be seen. It has not been enthusiastically received by most commentators.

  • Report this Comment On March 31, 2013, at 12:44 PM, deasystems wrote:

    The author asserted that, "Samsung's Galaxy S4 is going to run away with the market next month, and that's even with its surprisingly stiff contract price of $250."

    That remains to be seen. Its introduction has *not* been enthusiastically received by most commentators.

  • Report this Comment On March 31, 2013, at 1:10 PM, lkmd98 wrote:

    Owned apple since 1992. These article repeat every 5 years. Its laughable. Why does everyone think apple is a cell phone company? They used to be a computer company. They used to sell computers and software. What apple is today is the big question. Apple university teaches students how to take an industry we as consumers hate (internet providers, telecoms, cable providers, etc.)

    an fix them. They have changed to world in retail, advertising, web distribution of music and movies. They were the first in WIFI, killed the CRT, killed the Floppy drive, Killed the cd, dvd. Now killed the HD..... Lets get excited again. I hope Apple builds a CAR, a TV, buy ATT and let us out of our misery. Start a Airline! Build a UNIVERSITY. Build a private HOSPITAL! I love Apple products.

    No Samsung for me. Virus, worms, hacking on the way for Android....

  • Report this Comment On March 31, 2013, at 1:32 PM, TimKnows wrote:

    BlackBerry is killing Apple and we aren't even talking about that yet, that's an expensive mistake.

  • Report this Comment On March 31, 2013, at 4:37 PM, henrystar wrote:

    "It will do so again." Immediately the iSofa appears!

  • Report this Comment On March 31, 2013, at 9:08 PM, singaporenick wrote:

    Concerning this article,when analysts talk Apple down,as a share-holder I feel very happy.Analysts just follow the herd to try to satisfy their customers.They were talking Apple up (to $1000) when the shares were going up,now they have been talking them down.It's not a bad job being an analyst though:get paid big money for always being wrong.

    As for that moron correspondent DanManners,what planet is he living on? And can someone please tell him that Steve Jobs unfortunately is no longer with us-it appears he has not heard yet.

  • Report this Comment On April 01, 2013, at 12:30 AM, PurpleBlue wrote:

    Speaking of innovation and wearable communications devices. ihear that they are working on the ishoe, an idea they stole from Get Smart, one of Job's favorite sitcoms as a youth. The promotional material is now being produced. "GetSmartPhone $99"

  • Report this Comment On April 02, 2013, at 6:34 PM, foolhardy7 wrote:

    Interesting to me that there still are so many articles on both sides.

    Two articles last year are what caused me to put a sale order on half my Apple stock for 699 (very happy about that), with the remainder on a 20% drop stop limit sale (happy about that too). One article pointed out the size of the company relative to the all-time largest market cap companies ever -- a position that is simply too large to sustain. The other(s) were on the success of Android in Europe, coupled with the huge sales required to sustain the levels of revenue that had become expected by the market. How many "this isn't that much different or better" phones will the average consumer buy? How long will the phone companies subsidize it? It felt like the emotional push was to 700, hence the 699 sale point.

    One thing I've noticed over the years is that the Motley folks have been really good about picking some good stocks. What they don't do, however, is suggest when to sell (until the stock is so beaten down that everything you've ever gained is gone). You have to do that one for yourself. This time I got lucky, and I can thank a couple articles that got me thinking about the rational limits to just how big a company can get, especially when so much of its sales are simply a new version of what most everyone already has. It was time. I cannot fathom how the company will ever see those sales levels again.

  • Report this Comment On April 05, 2013, at 11:43 AM, WineHouse wrote:

    OK. So Apple growth is slowing. Rate of growth still positive, and analysts all agree about that. That means it is growing---- duh. So why are people so happy to see a P/E of below ten????? A forward P/E of below ten? Why is this company worth so much less on a P/E basis than Pepsi cola or waste management inc or Colgate Palmolive????? What's up with all this? What is the hidden agenda of the big market manipulators?????

  • Report this Comment On April 05, 2013, at 12:54 PM, ffampuero wrote:

    There are so many "experts" when the events have already taken place. Does anybody ever look at Apple's cash hoard? Does anybody think that the company has become a Mutual Fund? . If we are "investors", does anybody think that INNOVATION is generated quarter to quarter?

    Let's rational and think for a while. How did Apple get here? Does anybody remember the "Newton"? No, I do not think so. With all the due respect that Mr. Jobs deserves for a lifetime achievement with not only Apple but with Pixar as well, he was NOT alone in running this company. This is one of the strongest companies in world and it will respond to the short term demands of people that go and out of the market with a tick or two in mind. Invest people, and think. Just think.

  • Report this Comment On April 05, 2013, at 8:09 PM, samedge2 wrote:

    This thread smacks of defensive Apple investors upset that they didn't sell at the peak, blindly ambitious fans of the company or upset with the lack of logic in the market.

    I agree with Rick in that Apple will innovate again, but their rapid growth trajectory of the last decade is over. People need to accept that. Apple's competitive edge died with Steve Jobs. With Tim Cook (who's an operator not an innovator), they're just riding their current product line into obsolescence.

    I give them 1-2 years to redefine another segment of technology. If it doesn't happen, they're in trouble.

  • Report this Comment On April 06, 2013, at 5:49 PM, RockyTopBob wrote:

    "Since he claims to have no stock position he is obviously compensated by someone for writing his crap"

    The TMF analysts that publish these articles do it so the Fool can make money from advertising. Haven't you noticed all the ads on this page? Do you also notice that some are directed to you via the data mining that the Fool does.

    TMF used to be all about educating people on investing. It is now big business and it's mostly about making money.

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