Should Investors Worry Apple's Sales May Decline This Quarter?

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Wall Street was clearly disappointed with Apple's (NASDAQ: AAPL  ) most recent quarter, as well as management's guidance for the current quarter. The technology giant failed to hit analyst expectations on iPhone sales, and its outlook left a lot to be desired. While a disappointing revenue forecast is cause for concern, it's important for investors to not lose sight of the big picture when it comes to Apple.

Apple's next two quarters represent a muddle-through period until the end of this year, when we're likely to see one or more of the company's new products. Those represent Apple's future, and should be the focus for long-term investors.

Earnings growth still likely
Apple's first-quarter performance was disappointing only in the sense that it failed to hit ambitious Wall Street expectations. Apple generated record quarterly revenue of $57.6 billion, up 6% versus the same quarter the year before. Its performance was due to strong sales of its key products. Apple sold 51 million iPhones and 26 million iPads during the quarter, which were both quarterly records. This resulted in earnings per share of $14.50, which represented 5% growth, year over year.

Still, the market seemed thoroughly unimpressed with Apple's performance, and the company's share price fell 8% on the day of the earnings announcement. What really hurt Apple seemed to be its current-quarter forecast. Apple expects to generate $43 billion in sales this quarter at the midpoint of its guidance. Should Apple produce $43 billion in revenue, it would represent a 1.3% year-over-year decline. Analysts are hoping for nearly $46 billion in revenue for its next quarter.

Competitors were a bit weak, too
Modest profit growth in the most recent quarter and a weak outlook isn't an Apple-specific issue. Electronics giant Samsung (NASDAQOTH: SSNLF  ) is seeing much of the same conditions facing its own business. Samsung's profit grew 5% in the most recent quarter, which was the slowest pace of growth since 2011. Its mobile device unit saw profit fall 18%, quarter over quarter. And, the company warned investors it would be difficult to grow profits this quarter as well.

Samsung is being squeezed by competition on both sides of the mobile device market. The iPhone obtains strong market share on the high end, and pressure from cheaper devices made by Lenovo (NASDAQOTH: LNVGY  ) means Samsung is in a bind. Going forward, Lenovo's presence is likely to intensify, due to the fact it recently bought Motorola Mobility for nearly $3 billion.

Even if its revenue dips slightly, Apple still has a good chance of reporting earnings growth. That's due primarily to its aggressive share buybacks since its earnings report. The Wall Street Journal reported that Apple accelerated its share repurchases to take advantage of the drop in share price. Apple bought back $14 billion worth of stock as its shares sold off after earnings. That's nearly triple the $5 billion Apple spent on buybacks in the entire first quarter.

Such huge share repurchases will go a long way to producing earnings growth. Since there will be fewer shares outstanding, each remaining share will get a larger share of profits.

Bottom line: One quarter doesn't make or break Apple's 2014
The other thing for investors to keep in mind is simply the long-term view. It's important to not get bogged down with one quarter's results. Apple may very well post weak revenue this quarter. That stands to reason, though, since it's the quarter after the holiday shopping period in the United States. Apple's second quarter is traditionally a slow one, and it's not a crucial quarter within Apple's fiscal year.

The bigger picture involves the new products Apple will release this year. Those, presumably, will really drive revenue and earnings growth over the next several years. The products Apple is rumored to be working on -- the iPhone 6, an Apple TV, or the iWatch  -- could all be on the docket. One or more of these products are likely to be released by the end of 2014. These next two quarters are simply a waiting period until Apple announces products that are set to generate much stronger growth.

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  • Report this Comment On February 19, 2014, at 12:34 PM, yragsapo wrote:

    I hope Wall Street takes Apple's guidance very seriously and doesn't consider it a purposefully conservative number that they know they can beat, hands down. The Steve Jobs era is over and Apple under Tim Cook and company give realistic guidance. The analysts who give the high end guidance should be given a really hard look by the SEC, because unless they are complete idiots, they are in the pockets of someone with a short position or with options who need the stock price to dump. Notice after January's guidance, the stock price ended up at $500.65 for the end of January. Think some fat cats needed the stock to finish the month near $500 to make the most money? I do.

  • Report this Comment On February 20, 2014, at 9:18 AM, P2PRG wrote:

    The mobile computer space is certainly a revolutionary technology that is changing the world as we know it. Time is the greatest cost in this new world. APPLE has apparently decided to spend time instead of all this money they have. Unfortunately, Tim Cook may wake up one morning and find time has run out and the Revolution is over.

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Bob Ciura

Bob Ciura, MBA, has written for The Motley Fool since 2012. I focus on energy, consumer goods, and technology. I look for growth at a reasonable price, with a particular fondness for market-beating dividend yields.

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