Opinion: In a recessionary world, analysts are crazy to beat up on Apple's numbers

The biggest player in town remains the best

Opinion: In a recessionary world, analysts are crazy to beat up on Apple's numbers
The stock market is a funny old place.

Despite announcing some of the most impressive sales numbers in corporate history, and its first dividend payment ever, analysts were still disappointing in Apple.

Its Q4 revenues of $36 billion were 'good enough' apparently, but Wall Street thought it should have made more profit.

(The banks have been so very good at doing that recently, of course.)

They were also very unsure about figures that showed iPad sales down 18 percent from July to September (from 17 million down to 14 million quarter-on-quarter).

"Apple Inc delivered another quarter of lackluster results," reckoned Reuters, hysterically, completely missing the forest view for the bark of the nearest trees. 

Mini dilution

The underlining reason for this attitude is the number crunchers predict - likely correctly - that Apple's gross margin will fall; they reckon from around 40 percent now to 36 percent next quarter.

The reason is its new mix of products.

While iPhone offers the best profit margins, the iPhone 5's margins are lower than previous models, while the new - and much cheaper - iPad mini cuts margins even more than iPad 2 and iPad 4.

According to CFO Peter Oppenheimer, the pricing of iPad mini is "aggressive".

Although it's more expensive than rival tablets from Google and Amazon, Apple won't make much profit on it, which is why it didn't want to sell it any cheaper.

Of course, the R&D expense of all this new innovation, not to mention setting up manufacturing facilities etc etc, also hits the company's bottomline. These costs have doubled year-on-year.

The next quarter

The result is many on the street think Apple may end up posting a drop in net income during Q1 FY13 period (the key three months of October, November and December); something not helped as the period is one week shorter than the comparable period in FY12 this year due to a calendar technicality.

The bar is set high too: Apple posted record quarterly profits in Q1 FY12 of $13.06 billion, with a gross margin of 44.7 percent.

Still, given the company's worth $571 billion, has cash and securities worth $121 billion, and remains only 13 percent off its share price's all-time high, I think Tim Cook and co can sleep soundly in their beds, no matter what Reuters et al think.

Apple's biggest issue over the next three months will remain keeping up with the demand.

More generally, the company's growth over the past years has been so phenomenal, it was always going to have to plateau (however relative that deceleration).

For, no matter how big China, at some point you're going to run out of new people to sell iPhones and iPads to. And that will be the time to reveal the TV strategy...

Contributing Editor

A Pocket Gamer co-founder, Jon is Contributing Editor at PG.biz which means he acts like a slightly confused uncle who's forgotten where he's left his glasses. As well as letters and cameras, he likes imaginary numbers and legumes.


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jon jordan
my view is that Apple is such an outlier that corporate types can't get their heads how to price it so you get (relatively) large volatility around the smallest issues.

this is concentrated because it's a consumer electronics company and people with an iPad or iPhone think they understand the business in a way they don't with mining or technical serivce outfits, for example.
Nicholas Lovell
The other two issues that I see:
- with gross margin falling (albeit by a tiny amount) and Apple saying that it can't price the Mini much lower due to COGS, investors are seeing stronger competition for Apple
- the payment of a dividend is a double-edge sword: on the one hand, investors rightly get cross with companies sitting on oodles of money. It's an investors job to allocate investment capital, not a company's. On the other, a tech company paying a dividend is often viewed as being ex-growth, meaning they can't think of anything better to do than to give it back to shareholders.

Apple therefore looks like a business where competition is hotting up and where even senior management thinks it is going ex-growth. If that is what investors think, the multiple of earnings or sales they are prepared to pay to own Apple shares will fall.

I haven't dug into the numbers in any detail, but if investors fear growth is slowing, that is likely to have more impact on valuation than the years results
Nicholas Lovell
One obvious point is that the company is not "worth" $571 billion if it has cash and securities of $121 billion.

Any one paying $571 billion for the whole of Apple would instantly get "cashback" of $121 billion, meaning that the enterprise value, as finance types say, is $450 billion.

That is still a staggering amount by any standards.