Apple Inc. Earnings: Where Will the Growth Come From?

On Wednesday, Apple (NASDAQ: AAPL  ) will release its quarterly report, and investors have to be nervous in their expectations that the tech giant will produce just about no growth in its fiscal second-quarter revenue and earnings. Even as the iPhone maker keeps holding some key advantages over Google (NASDAQ: GOOG  ) , Microsoft (NASDAQ: MSFT  ) , and other players in the mobile-device market, Apple nevertheless has its proponents clamoring for a new, innovative product launch that will do more than simply refresh long-lived franchises that some fear are becoming stale.

Apple's track record of success didn't come without bumps in the road, and in particular, the departure of Steve Jobs back in the mid-1980s led to Apple falling behind some of its tech peers until he returned in the late 1990s. Now, longtime investors fear that Jobs' death means that Apple's growth might never return. Let's take an early look at what's been happening with Apple over the past quarter and what we're likely to see in its report.


Source: Apple.

Stats on Apple

Analyst EPS Estimate

$10.17

Change From Year-Ago EPS

0.8%

Revenue Estimate

$43.55 billion

Change From Year-Ago Revenue

(0.1%)

Earnings Beats in Past 4 Quarters

4

Source: Yahoo! Finance.

Can Apple earnings start moving back up?
In recent months, analysts have cut their views on Apple earnings, slashing their March-quarter estimates by 6% and reducing their full-year fiscal 2014 and 2015 projections by more than $1 per share. The stock has fallen back from its best levels of the year, dropping 3% since mid-January.

Apple's fiscal first-quarter earnings report in January didn't inspire confidence among investors, as the stock dropped 8% following the announcement that Apple had sold far fewer iPhones than most people expected. Even with Apple facing supply constraints on iPhones and iPads during the quarter, the company seemed to catch up with demand by quarter-end, and guidance for revenue for the March quarter fell below analyst projections by 4% to 8%. Moves from telecom providers to clamp down on upgrades took a toll, and even promises of new products later this year didn't help Apple avoid criticism.

Source: Apple.

The main problem that Apple faces is that the proliferation of tablets, smartphones, and other mobile devices that run on operating systems from Google, Microsoft, and other competitors has put immense pressure on Apple's margins. Even though supporters argue that the quality of Apple devices is higher than those of its competitors, even low-end sellers of Android devices have an impact on Apple by driving potential demand for iPhones and iPads to cheaper price points. In response, Apple has lowered prices on older models, and that has contributed to narrower margins that put a lid on overall growth.

One huge advantage that Apple has long held over Microsoft is in security, and that advantage once again showed itself recently in the outbreak of the Heartbleed security breach. By keeping its security protocols on a tight leash among its developers and moving away from the use of OpenSSL, where the breach occurred, Apple dodged the Heartbleed bullet and could benefit from the perception of greater safety from Apple devices compared to those of Google and Microsoft.

Still, what Apple investors really want is a new product, and rumors about a possible iWatch smartwatch have been flying around lately. Yet uncertainty about how Apple could go beyond simply mimicking existing offerings tailored toward athletes and fitness-tracking has some of its advocates nervous about an iWatch, especially given how much pressure Apple is under to deliver a blockbuster.

In the Apple earnings report, watch closely to see how the company anticipates finding new growth opportunities. Without addressing the long-term threat of narrowing margins due to competition, Apple could continue its string of poor share-price performance following disappointing earnings announcements.

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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 April 21, 2014, at 11:45 AM, zippero wrote:

    The biggest factor in slowing Apple's earnings growth was Samsung, especially the galaxy S3 from the middle of 2012 to the middle of 2013. But that threat was a one-off event and already fading due to the failure of the Galaxy S4 and now S5 and is about to be rendered moot entirely through the release of the larger iPhones in a few months. Apple is eating into the 100 million Galaxy units Samsung used to sell every year. Also, the mere threat of malware and bugs like Heartbleed because of slow Android updates keeps Android out of the enterprise. Econ 101 says people have unlimited wants and desires, so the top 20% consumer with all the disposable income around the world who spends the most money on data plans and apps avoids the cheap crap and always wants and pays up for the best goods and services, because his level of disposable income allows it, whether it's phones, cars, or any other product or service in the world.

  • Report this Comment On April 21, 2014, at 9:44 PM, Renee wrote:

    Zippero:

    wow, so much wrong in what you wrote...let's see:

    -S4 was not a failure. It didn't meet Samsung's expectations for it, but it was far from a failure. Total SIII sales (which according to you was a "one-off event") were 50M units. The S4 sold 40M in the first 6 months (total numbers for the year are not out yet, but I'd wager that it sold more than the "one-off event" in total after a further 6 months, so it's another one-off, right?

    -S5 rendered moot? Thus far, it's outselling even the S4 at the same time period

    -Heartbleed has nothing to do with smartphones (Apple, Android, Windows, or any). Maybe you should look it up before posting.

    -Speaking of threats: did you even look at how many there were for iPhones/iPads? There was one, on average, more than every month for the past 2 years. So it's ironic that you post about threats and suggest going over to iPhones in the same breath

    -I agree that people have unlimited wants. But people these days also have access to the internet and information very easily, and can see the better and more-secure devices. Which, yes: often end up costing less (but not always) than the iPhone. So why would these people (that have the money for the best good) want to throw them away at inferior goods that cost the same (from Apple)?

    Well done, Zippero. Not sure if you're trying to make yourself feel better about your Apple product purchase, or just trying to lie so that people are more optimistic about AAPL stock because you happen to own it. Either way: FAIL.

  • Report this Comment On April 22, 2014, at 12:22 AM, zippero wrote:

    Korea Times just reported that Galaxy S4 sales were only 40 mil. in the past year, despite 63 mil. units being shipped. Korea's ETNews says Samsung ordered less than half as many S5's as S3's and S4's, which isn't surprising given Samsung already announced its results this year will be miserable. This is why the Galaxy S5's prices had to be cut by 10% worldwide from the get-go and also why analysts' expected EPS for Samsung this year is lower than last year's. Lastly, analysts expect the Galaxy and Note series to contribute far less to Samsung's bottom line this year vs. last year. They alone made up half of Samsung's total profits last year, but this year it'll be only about a third. It's not just Apple squeezing Samsung. It's the Chinese who are forcing Samsung to cut prices on its flagship Galaxy S5. Despite the world's biggest advertising budget, Samsung has no pricing power to speak of and is slowly succumbing to the inevitable Android commoditization wave. This has ramifications for Korea as a country. Still dependent on exports and lacking a large healthy domestic economy of its own and with old people outnumbering young people, the only solution is emigration if you still live there.

  • Report this Comment On April 22, 2014, at 12:27 AM, zippero wrote:

    Heartbleed affects Android 4.1, which is the most common version of Android at 34%, according to a Google Play store statistics.

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