Shares of computer and iPod maker Apple Computer (NASDAQ:AAPL) have fallen by more than 5% for the day as of Wednesday afternoon. It's not pretty, but it's a vast improvement over the 11% hit Apple initially took in after-hours trading yesterday evening, when certain investors overreacted to the company's fourth-quarter earnings report.
The results themselves weren't that bad. As a matter of fact, they were very impressive. Apple posted sales of $3.68 billion and diluted earnings per share of $0.38 after adjusting for one-time tax benefits. Sales and EPS were up 57% and 192%, respectively.
The problem with these seemingly stellar results is that Wall Street analysts, as is their wont, ignored the company's guidance of $3.5 billion in sales and $0.32 per share in earnings and came up with their own targets of $3.74 billion in sales and $0.37 per share in earnings. Based on the analysts' estimates, Apple's sales came up short.
For the year, Apple's sales were up 68% to $13.9 billion, and EPS were up 300% to $1.44 -- that's with the $0.12 tax benefit this quarter removed. These gains were made with increases in sales across all product lines and geographies, but sales of the company's iPod personal music players were the big winners, with unit sales up 220% over last year and 4.8% versus last quarter. On the conference call, analysts spent a great deal of time attempting to dig into why the sequential numbers weren't more impressive, but they had little luck, because Apple management was quick to point out that the numbers hit the company's internal expectations.
The key for Apple from here is building on the already incredible success of its music business (primarily iPods) and keeping the growth going in its core business of desktops and laptops. I'm just stating the obvious, but given the recent growth Apple has seen and the lofty earnings multiple it trades at, maintaining "the obvious" is no easy task. To that end, at a news conference today in support of its earnings report, Apple announced the rollout of a few new products, including a new video iPod that will be capable of downloading TV shows a day after they are broadcast, as well as a new iMac desktop with remote control that can serve as a home entertainment hub.
Apple is also sitting on a cash hoard of $9 per diluted share, but the company shows little indication to date that it will share that cash with investors. The general trend over the years has been for Apple's share count and cash balance to inflate during the good times, and then during the lean times Apple puts the cash toward repurchasing the shares it gave away in option grants. I expect the same trend to continue, with Apple using its cash to repurchase at least some of the increase in Apple's diluted share count over the past two years, which has increased by 130 million shares, or about 17%.
Before its earnings report was released yesterday, Apple's shares were priced for perfection -- in other words, they were based on analysts' estimates. And when a company is priced that way, it's hard to buy the stock and make a buck. But it's pretty easy to lose a few. It may seem crazy to suggest, but investors who want to tilt the odds in their favor should consider companies that the market doesn't consider hot, or even has a bit of disdain for. Microsoft (NASDAQ:MSFT) seems to fit into that category, and a solid case could be made for Cisco Systems (NASDAQ:CSCO) and Motley Fool Stock Advisor selection Dell (NASDAQ:DELL) as well. All three still have solid operations and strong balance sheets. Remember -- it was just a few years ago that Apple itself was considered a washed-up has-been.
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Nathan Parmelee adores the iPod nano. He owns shares of Microsoft but has no financial interest in any of the other companies mentioned. The Motley Fool has an ironclad disclosure policy.
