Apple stock opened down 3% in early trading today, placing it back below $400, before quickly clawing back above that mark.
If the post-earnings move is any indication, AAPL investors think $400 or so is fair. But I wouldn’t read into this as endorsement that Apple is back, though, because the stock is unlikely to move much higher than the mid-$400s in the near-term.
Here are the Q2 details: Apple earnings for its fiscal second quarter were $10.09 per share on revenues of $43.6 billion vs. $12.30 a share on $39.19 billion a year earlier. Even though both the top and bottom lines beat estimates, it was the first time Apple’s profit declined in a decade.
Yes, Apple sold 37.4 million iPhones in the quarter to top 2012 numbers, and iPads are red-hot with AAPL moving 19.5 million tablets vs. 11.9 million a year earlier.
But what it’s selling — namely, older-generation phones and the lower-priced iPad Mini — doesn’t have the same profit potential. Specifically, Apple gross margins shrank by more than 10 percentage points, to 37.5% from 47.4%.
This, in a nutshell, is the Apple challenge: It remains a powerful brand that is selling a ton of mobile devices, but no matter how many more it sells, it simply cannot grow its profits now that margins are on the wane.
The biggest risk, though? If Apple’s brand is tarnished … what happens when the top line also starts to run into headwinds and device sales stagnate? It’s a very real possibility. Competitors have closed the gap — from the Samsung (PINK:SSNLF) Galaxy line, the Google (NASDAQ:GOOG) Nexus line, Microsoft (NASDAQ:MSFT) with its Surface and Windows Phone and even long-suffering BlackBerry (NASDAQ:BBRY). It’s not like Apple is the only voice in the room anymore.
The Apple bulls continue to tout the cash and the single-digit forward P/E. But it’s important to know that the denominator in price-to-earnings ratios is also subject to change. Or put plainly: Apple is not guaranteed a jump in share price to get back to a P/E of 12. If Apple earnings continue to decline, then the P/E ratio gets bigger and resolves itself this way instead.
After the earnings flop, I remain short-term bearish and medium-term neutral on Apple stock. I think there might be another dip in store for AAPL, especially considering the macro risk and my general fears of a spring correction.
However, if you want to buy and hold for a few decades, I think Apple might be a decent risk to take. Longer-term, AAPL will stabilize, and its “insanely great” cash flow will ensure that Apple will stick around for a long time. Even if shares move sideways for a few years, it will deliver a decent dividend — AAPL hiked its payout 15% to $3.05 quarterly, or an annualized yield of about 3% — and plans to offer debt to pay for an ambitious program that will return $100 billion to shareholders by the end of 2015.
Just remember that Microsoft has had a very ugly go of things for the past decade, and it’s not unrealistic to think that Apple stock will suffer the came kind of sluggishness. Still, if dividends keep moving higher and buybacks prop up EPS, you could find a reliable 5% to 10% total return in Apple shares each year across the next decade.
After all, if you bought into Microsoft 10 years ago, you’d have a total return of over 60%, or about 6% a year. Not bad despite the negativity, systemic risks and the Great Recession in the middle there.
Just remember that an investment in MSFT does not have breakout potential. And neither will a long-term investment in Apple stock.
- How Apple weakness is affecting its suppliers. (Reuters)
- Some say Apple is too cheap to ignore, since smartphones aren’t going anywhere. (Business Insider)
- Barry Ritholtz has a gem here with his random (but insightful) thoughts on Apple stock. (The Big Picture)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.