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Apple Earnings Preview — Expect Another Ugly Quarter

Momentum has been working against Apple (NASDAQ:AAPL) for some time, and last week the tech stock edged under $400 for the first time since late 2011.

Unfortunately, the stock is very likely to slide further when it reports earnings tomorrow (April 23) after the bell.

AAPL is off more than 25% year-to-date, and a big part of that plunge was precipitated by poor Q1 earnings that missed the Street’s already-lowered expectations. This time around, Apple Q2 earnings should tally EPS of $10.08 on revenue of $42.53 billion, compared with a profit of $12.30 per share on revenue of $39.19 billion last year.

The decline in both the top- and bottom-line is not going to register well, since it will be the first year-over-year profit dip in 10 years — dating back to before the iPod rolled out. If we continue to see erosion in margins and a slowdown in Mac sales coupled with this historic EPS decline, things could get really ugly for Apple stock.

The bottom line just isn’t holding up now that Apple margins are under pressure. Phones powered by Google’s (NASDAQ:GOOG) Android continue to catch on, and as BlackBerry (NASDAQ:BBRY) and Microsoft (NASDAQ:MSFT) keep relevant in the enterprise game and iOS remains famously frustrating for IT departments, it’s hard to justify the high price tag for iPhones.

In addition to iPads not boasting the same margin that they used to — revenues per tablet fell 17% last earnings report — these first-mover tablets are also quickly losing market share. In February it was reported that Apple’s iPad now commands less than half the tablet market thanks to the rise of the Amazon (NASDAQ:AMZN) Kindle, Samsung (PINK:SSNLF) Galaxy and other popular alternatives.

The margins get even thinner when you throw in the fact that Apple is only able to compete thanks to smaller and cheaper gadgets like the recently launched iPad mini or a rumored bargain iPhone.

It all adds up to slightly lower sales and significantly lower profits.

That fundamental pressure on earnings is naturally resulting in pressure on Apple stock, too. According to Yahoo! Finance, in the past 30 days there have been eight downward revisions to Apple earnings targets for the current quarter. There have also been 10 downward revisions for next quarter’s earnings and 12 for full-year fiscal 2013 EPS.

Just this morning, Barclays moved its price target down from $530 to $465. Stifel also moved its target down from $650 to $600, and Mizuho changed its target from $575 to $550. Standpoint initiated coverage this week with a “buy” rating, but a $480 target.

That does not bode well.

Other concerns, including a recent report of soft Foxconn sales that could be a proxy for softness in Apple earnings, add up to a rather unpleasant earnings outlook.

Here’s where the Apple fans fall back on the old line that the company is still growing and is a bargain with a forward price-to-earnings ratio of about 8 right now.

They say that, despite the negativity, you should simply look at the fact that Wall Street targets remain dramatically above current pricing — and even if Apple “only” gets to $450 from here, that’s still a nice 10+% gain. Consider the fact that most Wall Street firms continue to rate the company a buy and have targets even higher and there is a good chance that buying Apple stock right now could work out.

I won’t argue with the logic. But keep in mind that sentiment plays a huge role on Wall Street, and companies often succeed and fail based on expectations that are not met.

Apple stock was a darling of investors everywhere because it could do no wrong. And now that the company has proved itself to be fallible — like any other company — the narrative has decidedly changed to one of AAPL in decline.

To me, until Tim Cook can change that narrative … there’s little upside for the stock. If you believe Apple earnings are going to be the catalyst that convinces the market things are different, then go ahead and buy.

Personally, I think the story will remain the same — a once-dominant tech company struggling to find its way.

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Jeff Reeves is the editor of and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

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