3 Reasons Apple May Let You Down on Monday

It will be time for Apple (NASDAQ: AAPL  ) to shine on Monday. The leading consumer-tech giant is reporting its fiscal fourth-quarter results after Monday's close. It's been a mixed bag for the titans of technology that have already reported this season, and Apple's performance could very well dictate which way the market goes on Tuesday. 

There are certainly plenty of reasons to be optimistic. Apple sold a record 9 million of its new iPhones in their first weekend on the market last month. The global economy's showing signs of life, giving consumers more money to spend on the bellwether's premium gadgetry. However, there are also a few reasons that the report may come up short. Let's check those out.

1. A great report is already priced into the stock
I know that I've been cautious on Apple lately. That may be infuriating to the bulls, but keep in mind that my preview article last quarter chose to highlight the three reasons Apple's report will impress the market. The first reason was that the stock was too cheap at the time. Apple's stock closed at $424.95 the week before its summertime report. Three months later we find the stock 24% higher at $525.96.

Has Apple earned those gains? Estimates are finally starting to inch higher in recent weeks after months of being walked down by analysts, but investors need to be careful with stocks that have had significant rallies heading into reports that on the surface may not seem all that impressive. The "sell on the news" temptation is too great, and it's not as if the market is betting on a great performance. 

Wall Street sees revenue growing just 2% to $36.8 billion, barely keeping up with inflation. Analysts see earnings per share slipping 9% to $7.93, and that means Apple's trailing earnings multiple will be increasing from 13.1 to 13.3 based on Friday's close. Bulls will counter that Apple routinely beats Wall Street's low-ball targets, but it hasn't been by much lately. The same Apple that used to trounce expectations under Steve Jobs' watch hasn't beaten the pros by more than 3% in each of the past four quarters.

2. Microsoft and Google are not fair indicators
We've seen Microsoft (NASDAQ: MSFT  ) and Google (NASDAQ: GOOGL  ) -- Apple's two most notable rivals -- hit new multi-year highs after posting encouraging quarterly results this month. Apple could be next, but let's take a closer look here.

Microsoft's Windows-fueled PCs are actually holding up better than Apple's Macs and MacBooks, according to third-party industry trackers. Apple's refreshed line may breathe new life down the road, but IDC and Gartner didn't paint very rosy pictures of Apple's PC business for the quarter that Apple will be reporting on come Monday.

As for Google, Android has continued to gain global market share at everybody's expense. Apple has made it clear that it's not out to win the market-share game. Yes, it actually increased the price tag of the new iPad Mini at a time when tablets are generally getting cheaper. The good news, naturally, is that this means Apple's margins should hold up well after several quarters of contracting. The bad news is that the next wave of tablet and smartphone adopters are the ones unlikely to be able to afford Apple's unsubsidized gadgetry.

In a nutshell, well-received reports out of Microsoft and Google earlier this earnings season don't guarantee a similarly robust report out of Apple on Monday.

3. Guidance could be a sore spot
How much are 2 million shiny new iPhones in China worth?

When Apple announced that it sold 9 million iPhone 5c and iPhone 5s devices during their first weekend of availability last month -- just ahead of the fiscal fourth-quarter finish line -- it was a widely misunderstood announcement. Some wrongly compared it to Apple's 5 million iPhone 5 handsets that were sold during last year's debut weekend. However, there are a few reasons this isn't an apples-to-apples (or Apples to Apples) comparison.

  • Last year's 5 million was only for the iPhone 5. The iPhone 5c this time around is the equivalent of the iPhone 4s, and Apple didn't provide that metric last year.
  • Apple counts sales as being sold to retailers, not the sell-through to customers. The iPhone 5 last year and iPhone 5s last month nearly sold out. However, the 5c was still in ample supply, yet those colorful dust-collecting smartphones were baked into that 9 million figure.
  • China was added as a launch market this time. The iPhone 5 wasn't introduced in China until December last year, and it sold 2 million units during its first weekend there. So we're talking about 9 million iPhones that include retailer-stocked iPhone 5c devices compared with what would have been 7 million last year in all of the same launch markets.

That last point about China may eat into guidance, since the buzz behind those 2 million phones sold in December last year won't be around this time. The rollout went from Apple's fiscal first quarter of 2013 to Apple's fiscal fourth quarter of 2013. Will that affect Apple's guidance on Monday for the first fiscal quarter of 2014? The good news for bulls here is that Apple will probably sell more iPhones, since it has all three months of the new quarter in China with the new iPhones, instead of just a couple of weeks last year. There's also the China Mobile (NYSE: CHL  ) wildcard.

China Mobile is the world's largest wireless carrier, but it currently doesn't carry the iPhone. That could change in a few weeks. A photo leaked in China pointing to a Nov. 11 iPhone release, and China Mobile could use it. The stock took a hit on Monday after posting disappointing financial results. 

Naturally, any insight out of Apple on the China Mobile situation during Monday afternoon's call could be a boost for the stock. It's also encouraging to see analyst profit and price targets finally starting to move in a positive direction. Sentiment is turning in Apple's favor. Now it's up to Apple to keep it that way, making sure that the three reasons to worry that I've pointed out either don't happen or are outweighed by positive developments.

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

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 October 26, 2013, at 12:55 PM, desertracer1 wrote:

    In todays world anybody can write BS and get away with it.

  • Report this Comment On October 26, 2013, at 2:12 PM, gametv wrote:

    rick - you seem to be neglecting that apple has raised production on the 5S by 75% (if those rumors are true). i also would say that although apple has rallied into this earnings report, it hasn't really rallied that much compared to the market. it is still pretty dirt cheap when compared to other tech companies. my guess is that guidance will be the real driver here. if apple guides the next quarter up, then the sell on the news crowd will be swamped by buyers who will have to cover, which will prevent any decline. we will see in just a few days, but my bet is that apple is transitioning back into revenue and profit growth for the coming year and that analysts and investors will be playing "catch up" for the next couple months as they realize that (driving the stock higher).

  • Report this Comment On October 26, 2013, at 5:13 PM, TheWick wrote:

    It is a pity that folks could write these "analyses" with no accountability whatsoever. If you end up bring close to correct ten great but if you are wrong then there is no accountability. One point about the 5S and 5C first weekend sales, all these 'reasons' were known to the so called analysts when they came up with their original estimates. Once the company announced 9 million, without having the decency to acknowledge they missed the estimate these folks now come up with all these 'reasons' --- sad commentary!

  • Report this Comment On October 26, 2013, at 5:47 PM, SimchaStein wrote:

    Very amusing, very foolish, you win the week's prize.

    1) ".. already priced in.." The stock is discounted by 8% at current prices.

    2) Google and Microsoft? I skipped the paragraph - irrelevant.

    3) Guidance? Apple just said they will come in near the top of sales and earnings. Factor in stock repurchases That could boost EPS by 2%. Next quarter's guidance will be fine also.

  • Report this Comment On October 27, 2013, at 4:07 AM, chrischamb1 wrote:

    Rick Aristotle Munarriz may have been writing for MF for 18 years, but he hasn't written a reasonable article in at least 5 years!......Glad to see he is being consistent and that nothing has changed.

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