Apple Back at $500: Time to Buy or Time to Panic?

MacBook Pro with Retina Display. Source: Apple.

Deja vu. That might be how some Apple (NASDAQ: AAPL  ) investors are feeling today. A year ago, Apple shed 11% after reporting fiscal first-quarter earnings with iPhone sales falling short of expectations. At the low this morning, Apple shares were down nearly $50, or 9%, after iPhone sales again came in shy. Both times, Apple set new all-time records of most of its pertinent metrics. Both times, it wasn't enough.

With shares flirting with $500 again, is it time to buy or time to panic?

The headliners
Revenue totaled $57.6 billion, which translated into net income of $13.1 billion, or $14.50 per share. The Mac maker sold 51 million iPhones, 26 million iPads, and 4.8 million Macs. Investors were expecting at least 55 million iPhones, and that shortfall is partially driving the sell-off. On the other hand, iPad units came in quite strong.

Source: SEC filings.

The iPhone 5s was supply constrained throughout the quarter, as were all iPads. However, Apple did exit the quarter in supply and demand balance for both iPhones and iPads, as it was within its target range for channel inventory.

Guidance for the March quarter calls for revenue in the range of $42 billion to $44 billion, while the Street is modeling for $46 billion. The company also repurchased $5 billion of stock. Let's dig in to all of the above.

Let's talk iPhone
There's been a lot of skepticism surrounding the iPhone 5c. On one hand, perhaps consumer demand for a plastic iPhone isn't as robust as investors had hoped. On the other hand, that could shift the product mix favorably toward the higher margin iPhone 5s. The challenge here is the iPhone 5s faced constraints throughout the quarter and Apple spent most of that time trying to build more. 

iPhone average selling prices put up a notable sequential gain from $577 to $637, further confirming the shift toward the 5s. Cook conceded that the 5s received much more attention and grabbed a higher mix of sales than expected. The 5c did get a significant number of new iPhone users to the platform, though.


Source: SEC filings

Additionally, Tim Cook acknowledged that the North American business did not perform as well as expected and contracted slightly. In addition to the supply constraints, carriers have tightened their upgrade policies. Last year, both AT&T and Verizon extended upgrade eligibility from 20 months to 24 months. Apple expects these effects to be temporary.

The guidance game
At face value, revenue guidance left a little to be desired. However, there are four factors that are holding it back to the tune of $2 billion. Last year saw some channel inventory increases due to a longer product rollout, iPod sales will continue falling, the dollar is strengthening against other currencies, and those deferrals we talked about last quarter will continue weighing on recognized revenue.

Still, with the China Mobile launch occurring this quarter, some investors (including myself) were expecting more of a tailwind heading into this quarter. It's important to note that China Mobile has only launched its 4G TD-LTE service in 16 cities, which are the only markets that Apple is selling on China Mobile's network. By the end of the year, China Mobile's deployment will reach 340 cities.

China is coming back
Speaking of China, Apple has come back in a big way in the Middle Kingdom. The Greater China business dipped precipitously last summer, but has jumped to a new high. Cook mentioned that including retail, Greater China grew by 31%.

Source: SEC filings and conference calls.

That puts revenue at $9.5 billion. 

Icahn can't always get his way
Last fiscal year, Apple repurchased $22.9 billion of stock, of which $12 billion was executed through an accelerated share repurchase program. Including the $5 billion repurchased last quarter, Apple has now bought back $28 billion of stock. That's almost half of the total $60 billion authorization that's good through the end of 2015.

That $5 billion is also just a tenth of the $50 billion that Carl Icahn wants Apple to buy back this fiscal year. Apple retired 9.6 million shares, putting its average price paid around $520. Icahn will just have to occupy himself with buying another $500 million, which should bring his stake to around $4.1 billion.

There's more where that came from
Tim Cook is on record saying that Apple will launch new product categories this year. This ambiguous plan is still on track. According to Cook, Apple has "zero issue[s] coming up with things we want to do that we think can disrupt in a major way."

Cook also teased the possibility of Apple entering the mobile payments market in a big way:

The mobile payments area in general is one that we've been intrigued with and that was one of the thoughts behind Touch ID. But we're not limiting ourselves just to that. So I don't have anything specific to announce today. But you can tell by looking at the demographics of our customers and the amount of commerce that goes through iOS devices versus the competition that it's a big opportunity on the platform.

Among other things, Apple could very well launch larger iPhones and an iWatch this year. Just don't expect Cook to discuss them on an earnings conference call.

Time to buy?
Ultimately, the underlying business remains robust. Apple shipped 153.5 million iPhones during 2013, enough to grab 15.5% of the global smartphone market that approached 1 billion units last year. That's a particularly incredible feat considering that Apple only plays in the high end. The only vendor outselling Apple, Samsung, is increasingly relying on low-end and mid-range devices to drive its unit shipment growth -- and seeing profitability squeezed in the process.

Apple is still the best at what it does.

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Comments from our Foolish Readers

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  • Report this Comment On January 28, 2014, at 1:24 PM, Trololololo wrote:

    Yesterday's results remind me of the virtue of patience. Peter Lynch once said that a stock's valuation eventually will correlate with its earnings and earnings growth. The important word is "eventually." That is why patience is required of any investor.

    Apple beat analyst estimates for both revenue and earnings, yet got slapped because the quantity of phones sold was beneath analysts' expectations. This begs the question, who is right: analysts or Apple? Did Apple fail, as headlines suggest, or is that that analysts are both impatient and incompetent?

    It begs another question: when an analyst does a poor job of correctly projecting, why is it that they are not held to account? It seems that the two safest jobs (if you can get one) would be a stock analyst and a TV weatherman.

    Please call me wrong. Please correct me in the error of my ways. But I have always believed that everyone is accountable, but it seems as though investment analysts aren't. Could someone please explain their perceived all-knowing omnipotence?

  • Report this Comment On January 28, 2014, at 4:15 PM, Skoob12528 wrote:

    Those analysts are a bunch of stock manipulators. They still increased their revenue, despite the iphone segment falling, and bought back billions of dollars worth of shares. Bottom line? They made more money and there are less outstanding shares. They're worth more.

  • Report this Comment On January 28, 2014, at 4:48 PM, derg1 wrote:

    this is just another buying opportunity.

  • Report this Comment On January 28, 2014, at 5:09 PM, alan0101 wrote:

    Agree that analysts always have an agenda they do not disclose.They are interested in volatility whether they support shorts or longs or both. They also are not very good at understanding businesses and the drivers that determine ultimate success. And their time horizon is very short term, if they didn't have the megaphone effect of the media, nobody would listen to them, and nobody would miss them.

  • Report this Comment On January 28, 2014, at 5:27 PM, CCCapital wrote:

    Well said guys

  • Report this Comment On January 28, 2014, at 5:38 PM, cmalek wrote:

    @alan0101:

    Let's not forget that the analysts get paid for generating trades for their brokerage house, not to be right in their analysis. In fact, if you keep close track of analysts' predictions, one day they will be saying a company's stock is a flaming buy and then couple of days later, they're telling the world it's a strong sell. With no intervening news about the company. As far as I am concerned that is market manipulation but, unfortunately, the SEC does not see it that way.

  • Report this Comment On January 28, 2014, at 5:57 PM, JJOSTINATO wrote:

    Trololo…I agree 100% with your AAPL analysis. One of my pet peeves, however, is the misuse of the phrase, "begs the question." Look it up and you will see that no questions were begged!

  • Report this Comment On January 28, 2014, at 6:15 PM, OHGtop10 wrote:

    In my opinion Apple got dinged for guidance and lack of future growth. I think that the stock would actually go up if they burned their 160 billion in cash. The PE then would be somewhere between 7 or 8. IMO the price action is ridiculous, but it could always get cheaper. I am suggesting the company buy back more shares, pay the people who make their products more and donate the rest.

  • Report this Comment On January 28, 2014, at 7:17 PM, rgardner101 wrote:

    Let's see a little blood on the street and Icahn buys 500 million more$ of Apple,,

    He didn't get where he is by making dumb moves

    The ANAL lists are off the mark again

  • Report this Comment On January 28, 2014, at 7:18 PM, ForgetGold wrote:

    Great in site. Its a BUY now for sure!

  • Report this Comment On January 28, 2014, at 7:38 PM, TamIam wrote:

    Why is it always someone have to explain some or a group of incompetent analysts got it all wrong. The stock suffers for it. There should be someone monitoring these phony experts.

  • Report this Comment On January 28, 2014, at 7:57 PM, 1Tigercat wrote:

    I use to buy this stock around fourteen and sell at twenty nine for years. It was a fun easy way to make money when I was fooling around with other endeavors . Every time I bought it my broker told me the company was on the way out and panicked so I bought more.. That idiot made me more money in the methodology of what ever they said I just did the opposite. It was like what would Jesus do in reverse for a test question. Jesus questions were for morality my stock guys advice was used on how not to invest. He died one day, god do I miss him he could not guess the right side of a coin ever even in a hundred tosses. Then one day I turn around and it is eight hundred. go figure

  • Report this Comment On January 28, 2014, at 9:13 PM, jordanwi wrote:

    Yes they made a lot of money. Huge profits. But it's relative to the market cap, folks. They sure the heck better make 13 billion dollars if they're a half a trillion dollar company.

    The problem is growth. Forget the giant numbers - the company isn't growing. They need a new product or competition/margin compression will see this company go much, much lower.

  • Report this Comment On January 29, 2014, at 5:06 AM, ashleyjames389 wrote:

    im still optimistic about Apple, i think china mobile deal will have a great impact soon

    http://bit.ly/AppleBreakDown

  • Report this Comment On January 29, 2014, at 6:54 AM, Mathman6577 wrote:

    I'm in for the long term on APPL (and all of my stocks). Any company that has > $150B in cash and little debt has to be doing something right. I like to ignore the quarterly buzz and look at annual reports and really long term trends.

  • Report this Comment On January 29, 2014, at 6:58 AM, Mathman6577 wrote:

    @Jordanwl: AMZN is a $180B company (and growing) but makes little money (and has no EPS growth). They always seem to get a pass from the "analysts".

  • Report this Comment On January 29, 2014, at 7:18 AM, will1946 wrote:

    Perhaps when it hits $400.

  • Report this Comment On January 30, 2014, at 3:28 AM, ashleyjames389 wrote:

    im still optimistic about AAPL, people are misinterpreting latest earnings, i think the company will comeback strong

    http://bit.ly/AppleBreakDown

  • Report this Comment On January 31, 2014, at 2:46 PM, cmalek wrote:

    @jordanwi:

    "They need a new product "

    Unfortunately with Jobs gone, Fruitco has no visionary. Sure, the new Apple products will still sell just because they're from Fruitco but they will be evolutionary, not revolutionary.

  • Report this Comment On January 31, 2014, at 3:24 PM, mslegalidiot wrote:

    whatever happened to your recent hot recommendation of INVN? You have turned very silent on this stock.

  • Report this Comment On January 31, 2014, at 6:22 PM, gingerbreadfred wrote:

    like Icahn said, this stock is a no-brainer. Simply look at the big picture and the story tells itself...it's got all the right pieces

  • Report this Comment On January 31, 2014, at 6:46 PM, whyaduck1128 wrote:

    Trololololo, alan, skoob--Well said. Apple's stock price is getting punished because some analysts decided well ahead of time that whatever numbers the company posted, they'd be "disappointing". I think many of them (and/or their string-pullers) deliberately overinflate their "expectations" and sell short, just to be "disappointed" and be the buyers when their clients panic.

    Personally, I've put in a buy order for a small amount of shares at an even lower price. I'll be happy if it doesn't go that low, and just as happy if it does so that I'll have more. AAPL isn't the largest holding in my portfolio, but it's one of the very few I don't even think of selling. I don't use their products, but boy, do I believe in the company.

  • Report this Comment On February 01, 2014, at 12:34 AM, CMuskus wrote:

    Well said everybody, after years working in the financial services industry I must say that Analyst is the best position you could ever get : you are wrong 75 % of the time (average of companies that publish results better than expected) and you are still making tons of money.

  • Report this Comment On February 01, 2014, at 5:01 AM, famulla wrote:

    It may be worth buying Apple now but the idea of Samsung coming up fast scares many

  • Report this Comment On February 01, 2014, at 9:00 AM, ade61 wrote:

    What is this Deja vue ?

    The manipulation of the stock market and economy continues. The government reports on US improving economy and employment is just smoke and mirrors created by the of newly printed money by the Federal Reserve that when to the right place Wall Street that has again created another asset Bubble.

    The Following is comments I wrote about Apple in 2012. . .

    Apple stock price is worth every penny, That’s if you are smoking the right stuff.

    The insanity of the speculative markets continue to be cheered by deceptive advocates who have made fortune but don’t acknowledge the actual cost to the United States future which is likely to see a declining standards of living in the years ahead . This is all done for a cause, so that a handful of Hedge Fund Managers can make their billions by manipulating the stock market to show an illusion of prosperity returning to the economy.

    The rapid rise in apple stock price has nothing to do with current earnings but is based solely on speculative growth with GREAT EXPECTATIONS that sales growth will increase by 20% annually or more for the next five years. This is why the cheerleaders believe apples stock is significantly undervalued even though it has increased by over 250% in the less than 2 years.

    It was not long ago the herd believed that house prices could never go down but would continue to increase rapidly year over year. Just as the apple cheerleaders believe its stock price cannot decline, but will continue to increase. As long as the herd believed the fairytales being promoted in regards to Apple’s sales growth its stock price will increase. As soon as one of Apple's major institutional investors decides to take profit the others will follow like a herd of sheep jumping off a cliff and you will see the results in Apple declining share price.

    Every additional billion of net income will be more difficult to earn, due to its enormous size which is 1000 million. If the analyst’s 2012 forecast are correct Apple’s revenue will increase by 25 billion or 25000 million dollars. This amount of money buys quite a few Ipads, downloads and other apple products. How many more apple products can the market absorb?

    By comparison NASA Space Shuttle operating budget in it last year was 3 billion. I provide this as an illustration, to give the cheerleaders a clued about the staggering amount of income apple currently has.

    Apple’s income growth is beginning to slow, but this does not stop the analysts from developing deceptive forecast about Apples future growth citing its relatively low market share of worldwide computer, Smartphone and Tablet sales.

    One must ask who is paying these analysts for these deceptive forecasts. Could it be the herd on Wall Street which severely damaged the US Economy by all the financial instruments which were developed, supposable to limit risk, but were merely another device which allows them to hedge their bets? .

    It’s not surprising that 70% of Apple’s stock is owned by institutional investors. Apple as company is a great candidate to collude on, due to its incredible growth rate over the last 5 years and the difficulty in evaluating its most important characteristic that is the marketing of its products.

    Marketing is an intangible asset, akin to Goodwill which is very difficult to evaluate There is a reason, Apple’s sales are less than its competitor which is due to their considerably higher cost, which in many cases are functionally no better than their competitors. But if you listen to the experts, it’s like Apple has no competitors or competing products which the consumer can choose, but can only buy Apple products.

    If Apple wishes to capture more market share of sales it will require developing additional products with lower prices as the more affluent markets have been saturated, leaving the less capable markets the task of buying all though millions products which are forecast to be manufactured and sold by apple in the coming years.

    Just as computers, big screen TVs and many other electronic devices have been commoditized, so will apple products if they wish to generate more sales.

    This directly relates to Apple’s value as a company and its allege income growth potential. Guess what else is affected by a lower sale price? That’s right earnings and net income will be lower, which is another reason Apple income will stagnate.

    Second 2012 comment

    Apple as corporation has liftoff and now is entering an orbiting phase of its life cycle which will eventually lead to a decaying Orbit.

    The belief that Apple’s stock is undervalue due to future earnings potential in foreign lands is a deception which will soon be revealed due to market saturation and competing products with similar functionality that are available at a lower price point. The principles of supply and demand, along with substitution are in play. The principles of substitution states when a several similar or commensurate commodities, good or services are available, the one with the lowest price will attract the greatest demand and wide distribution which is why many US companies move their manufacturing overseas, lower labor cost.

    Apple‘s products are not immune to these principles.

    Apple has sold approximately 210 million iphones since its inception four years ago. The growth rate of Apple’s iphone is astonishing with 270,000 iphone sold in the first year and five years later, if reported sales data is accurate is approaching 100 million units for 2012.

    Iphone sale will slow next quarter and there after maintain a steady sale rate very much like a rocket which has reach an orbit until other forces slows it momentum and its orbit begins to decay.

    The Analysts belief that Apple is going to expand it sales by 20% a year for the next 5 years at current pricing is a deception. To accomplish this, Apple sales will have to increase to 153 billion in 2012 and by 2016 have annual sales of 318 billion. This equates to approximately 250 million iphone sold or 685000 iphone sold daily in 2017. Iphone sales are the anchor of Apples earnings.

    What if the iphone is not the flavor of the day in 5 years? Could this possibly happen? It has already begun in the United States as Apple will not retain all of its former users as the Iphone and Ipad interface with peripheral devices is lacking.

    The fact is Apple is manufacturing at least 340,000 iphone and 125,000 Ipad each day. That is if their last quarterly report is accurate. That means the world in one year will have an additional 124 million Iphones and a only some 45 million Ipad which will have to be purchased. In five year if projected growth rate of 20% annually are accurate there will be nearly 1 billion Iphones and 450 million Ipads sold. Apple product will be commonplace and just other commodity with significantly lower pricing which will dramatically affect apples profitability.

    The majority of Apples sales will not come from the United States as its market has already been saturated and now the Apple fade being diminishing. You can see evident of this in its declining stock price.

    The belief that foreign markets has the ability to absorb the millions of iphones, Ipads and other products being manufactured is not accurate at least at current pricing which is unaffordable to the masses.

    I know a lot of you Apple lovers have a belief that the first item purchased by Chinese or Indians when money earn is a phone. This is preposterous I would think it would be food and clothing.

    But hey I but I can imagine all the naked malnutrition Chinese walking around texting and talking on their new iphones and Ipads. I am now having a mental picture of Indians wearing nothing more than their Head Wraps.

    Just as any life cycle there is a beginning a growth an prime and a decline. Considering the competing products and other factors Apple is likely reaching a plateau considering its staggering amount of income it is currently earning.

  • Report this Comment On February 01, 2014, at 12:18 PM, Hfish1212 wrote:

    With Jobs gone, investors are worried about innovation at Apple.

  • Report this Comment On February 02, 2014, at 4:23 AM, famulla wrote:

    NO stable politics no sale ??? Munich delegates had earlier greeted his remarks with booming applause, when the former boxer said: “The protesters are on the streets with pro-European banners because they fear European values are dying in their country.”

    They greeted remarks by Ukraine’s acting foreign minister, Leonid Kozhara, whose government is linked to murders and kidnappings, with silence.

    Klitschko noted that what the opposition needs in the short term is EU sanctions on Ukrainian officials to pressure them to call early elections.

    “They enjoy European cars. They send their children to Europe to study. They receive medical treatment in Europe. They live in Europe, and this would be very painful - personal sanctions against people who violate human rights,” he said.

    He described their assets in EU banks as “blood money.”

    Neither the promise of an EU perspective nor EU sanctions on President Viktor Yanukovych’s administration are a likely prospect for now.

    Fuele instead offered that EU foreign affairs chief Catherine Ashton could “facilitate” talks between the regime and the opposition.

    Meanwhile, Zbigniew Brzezinski, a former US national security advisor, said the solution to the Ukraine crisis might lie in Washington and Moscow as much as in Brussels or Kiev.

    “The US and the Russian Federation have to talk to each other about this because the issue involves the larger dimension of European stability,” he told the Munich event.

    He also urged the EU be more “assertive,” however. Are we really on the right track now?

  • Report this Comment On February 02, 2014, at 4:59 AM, famulla wrote:

    FROM INDIA BUT VALID IN ALL PLACES A couple of years ago, a group of feminists got together at Barnard College to discuss ways of raising funding for the work put in by feminist bloggers and writers on the internet.

    Courtney Martin and Vanessa Valenti, the conveners of the meeting , said that their objective was to provide a greater voice to minorities . "Women of colour and other groups are already overlooked for adequate media attention and already struggle disproportionately in this culture of scarcity," they wrote.

    On the face of it, Courtney and Valenti's objective seems well intentioned."They weren't prepared , though, for the wave of coruscating anger and contempt that greeted their work. Online, the Barnard group - nine of whom were women of colour - was savaged as a cabal of white opportunists... There was fury expressed on behalf of everyone whose concerns were not explicitly addressed," writes Michelle Goldberg at TheNation. com.

  • Report this Comment On February 04, 2014, at 7:30 PM, famulla wrote:

    Much of what he does and thinks is informed by his family and life experiences, Nadella said. The 46-year-old has been married for 22 years -- as long as he has worked at Microsoft -- and has three children.

    Nadella noted that many acquaintances say his curiosity and desire to learn are his defining characteristics. He said he buys more books and signs up for more online courses than he can finish, reflecting his belief that if one stops learning new things, one ceases to do great and useful work.

    His family, curiosity, and thirst for knowledge define him, he emphasized.

    Of course, those human traits combine with an assortment of company-oriented skills -- like his engineering capabilities, business vision, and capacity to bring people together, as Gates noted.

    'Do Amazing Things'

    Nadella said he works at Microsoft for the same reason he believes many join the company: "to change the world through technology that empowers people to do amazing things."

    Computing will become even more prevalent and intelligence will disappear into the background, he predicted, as consequences of the growing Internet of Things, increasing cloud computing capacity, Big Data insights, and machine learning intelligence.

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