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AAPL Stock Finally Cracks – Apple Earnings Spell Trouble

Apple (AAPL) just posted results that didn’t exactly impress Wall Street, and the tech stock is selling off pretty significantly. In after-hours trading Monday, the stock shed more than 5%, and AAPL stock should open Tuesday down about the same.

apple-earnings-aapl-stockBut the million-dollar questions are why AAPL stock sold off, and whether Apple earnings indicate continued declines are ahead.

Here are the highlights of Apple earnings: The tech giant reported flat profits on tougher competition from Google (GOOG) powered Android devices, with the Apple iPhone in particular seeing pressure. But margins were good and profits better than expected.

If you care about specifics, the Wall Street Journal has them … but a quick rundown includes:

  • Earnings of $13.1 billion, or $14.50 a share, vs. expectations of $14.07 a share.
  • Last year, Apple earnings were $13.08 billion, so profits were up slightly.
  • Sales for Q1 2014 totaled $57.6 billion on expectations of $57.46, so a slight beat there.
  • That’s up from AAPL sales of $54.51 billion a year ago.
  • Apple margins hit 37.9% in fiscal Q1, at the high end of a 37% to 38% forecast range.
  • Apple said it sold 51 million iPhones, short of a projected 55 million on the quarter, though up from 47.8 million a year ago.
  • AAPL sold 26 million iPads, topping forecasts of 25 million and up from 22.9 million Apple iPad sales in Q1 of last year.

You can parse the numbers all you want, but it appears that the tale they tell is of a company that is pretty much right where analysts expect it to be. Unfortunately, that involves AAPL stock posting slightly-better-than-flat revenue and profits.

Worse is that some of the numbers aren’t where analysts expect them to be.

Specifically, Apple’s current-quarter revenue forecast came in between $42 billion and $44 billion, which was well shy of the Wall Street expectation for $46.05.

The challenge, then, is that the snap-back rally in Apple stock in anticipation of earnings is starting to look overdone. The stock is up about 25% in the last six months, on optimism that the agitation of Carl Icahn will keep buybacks flowing and that the worst has been priced into AAPL stock.

Sentiment and valuation apparently seems to have been off base, after the miss on iPhone sales — still an important driver of profit — and the rather ho-hum performance of other metrics.

In other words, Apple investors seemed to expect that things were different … but earnings reinforced the narrative of early 2013, with a company that might be losing its edge and is simply moving sideways right now.

I certainly don’t expect AAPL stock to crash and burn. But after a lackluster earnings report, it’s reasonable to expect short-term challenges for Apple stock. There is simply not enough reason to bid shares higher after the run-up from summer lows — and I expect Apple to trade in a pretty tight range around $500 a share for some time until something breaks it out of the doldrums.

Many investors hoped earnings would be that catalyst, that it could send AAPL stock back toward $600.

But they have been sorely disappointed.

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP

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