Here’s why Apple lost $60 billion after record iPhone sales

22 Jul 2015 | Author: | No comments yet »

Apple is held to a different standard by Wall St.

Sure, it can do many useful, even delightful things, such as showing us incoming texts and email, tracking our heart rate during exercise or letting us send digital doodles to friends.Ordinarily, if a casual observer heard one of the world’s largest companies had grown its revenues and profits by more than a third they would consider that a strong performance. But Apple is held to a different standard by Wall Street and after iPhone sales came in slightly lower than investors hoped, they wiped $60 billion (€55 billion) off its valuation in after-hours trading on Tuesday night. For keen Apple watchers, this pattern has become all too familiar: the company stuns investors with a series of strong, forecast-busting quarters; the stock rallies, as it had this year by around 18 per cent before Tuesday’s earnings; and then shareholders panic when its results fail to match their ever-rising expectations. “There’s a strong sense of history repeating itself,” said Geoff Blaber, analyst at CCS Insight. “They’ve outperformed every quarter but you cannot continue to do that indefinitely.

Early Apple Watch owners seem generally happy with it, but Apple’s bigger worry should be those on the sidelines — even hardcore Apple fans, not to mention the rest of us — who are waiting to take the plunge. They are at this point where any slight miss, investors knee-jerk.” The question hanging over Tim Cook, Apple’s chief executive, is whether Tuesday’s reaction signals a repeat of this time last year, when Wall Street quickly shrugged off a quarterly report that failed to trounce its forecasts, or 2012, when concerns about the iPhone’s longer-term growth sent its share price tumbling for months. “I suspect that the big challenge by the second half of 2016 is that iPhone growth does start to slow,” Mr Blaber said. “The question then is, where does that growth come from?” During Tuesday’s earnings call, analysts pressed Mr Cook on the prospects for two potential engines of growth: China, in the near term, and the new Apple Watch. Apple hasn’t released sales figures, but its quarterly financial report Tuesday suggests that they were lower than many Wall Street analysts expected, even though they exceeded Apple’s internal projections. “It’s been cast as a want, not a need,” said Matt Quick, a Topeka, Kansas, engineer and Apple fan who is holding off on getting one. “I’m kind of waiting to see what next year’s model will bring.” Patrick Clayton, who has had Mac computers all his life and owns an iPhone and several iPads, returned his Apple Watch after three weeks. The fluctuations of the Chinese stock market have raised questions over the spending power of its middle class, who are driving the iPhone’s popularity in Apple’s second-largest market.

It nagged the physically active New Yorker to stand up during a six-hour flight. “Apple is famous for telling us what we need before we need them,” Clayton said. “I thought this would be the case with the watch. For Apple at least, “this worry is probably overstated”, he said. “It should not be a surprise to see sequential declines given the retail purchase activity around the Chinese new year in February,” said Walt Piecyk of BTIG Research. Comment: “We are buyers on the 6% aftermarket pullback on shares of AAPL based on the belief that Apple will continue to gain share in the high-end smartphone market and margins will expand into the S cycle resulting in Street numbers inching higher over the next several quarters. Wristly, a research company created to study the watch, found that early buyers are overwhelmingly satisfied, more so than with the original iPad and iPhone.

The consensus among analysts had been closer to 49 million, with some of the more bullish analysts arguing that Apple would surprise us with as many as 52 million iPhones sold last quarter. While some investors will view the 48.1 million iPhones (ex channel drain) as a disappointment below investor thinking for more than 49 million units, the reported unit sales represent significant market share gains. Assuming an average selling price of $550 (the devices cost between $350 and $17000) Gene Munster at Piper Jaffray, the investment bank, made an initial calculation that Apple might have sold just 1.2m Watches, far below his earlier forecast of 3m.

For the Watch, we estimate Apple sold around 2.5 million units, which was in-line with investor expectations.” Comment: “Given the revenue, iPhone unit and EPS upside seen in the past two quarters, investors were likely looking for sharper upside. After all, early adopters of new technologies tend to understand that what they’re getting isn’t perfect. “I’d recommend it to people with an open mind,” said Dennis Falkenstein of Danville, California. But after being questioned by Mr Munster, Mr Cook presented a more confident outlook in the hopes that analysts might “avoid reaching a wrong conclusion”. With that said, we viewed this as a solid performance for the tail end of the iPhone 6 cycle, and investor attention is likely to quickly shift toward the iPhone 6s refresh later this quarter.

This, in spite of the fact that Apple’s revenue rose 33% to $49.6 billion and its net income rose to $1.85 per share, beating Wall Street estimates by four cents a share. Because the iPod and other accessories saw revenue declines in the quarter, Watch sales were greater than the entire “Other Products” category’s growth, implying revenue of at least $1bn for the new device in its first nine weeks. While the next iPhone family faces a tough set of comps, we continue to believe there is upside to expectations — particularly on gross margins.” Comment: “With demand strong despite these price increases in many regions, we see a path for channel inventory build in 2H15 that further supports our view that iPhone units can grow Y/Y. We like the set-up created by 1) lowered expectations, 2) lower than target channel inventory, 3) 73% of the installed base yet to upgrade to larger screen iPhones, which we believe can drive iPhone unit growth in FY16, and 4) continued strong international demand data points.” The headline numbers on earnings reports often tell only part of the story, especially with a company like Apple that is so obsessively tracked by analysts, investors, fanboys and bloggers.

While many suggest this already makes Apple Watch the top-selling smartwatch available, it nonetheless fell short of analysts’ hopes that sales might reach 3-5m for that period. Mr Piecyk slashed his prediction for the September quarter’s sales from 8.9m to 5m as a result. “It’s difficult to forecast this product, for sure, but we are still optimistic about the potential for a higher attachment rate as we enter the holiday season.” If indeed there was a shortfall, Mr Cook seemed not too worried. “Our objective for the quarter wasn’t primarily sales,” he said.

Instead, he pointed to the 8,500 Watch apps available and a survey by analysts at Wristly suggesting a customer satisfaction rate of 97 per cent, ahead of the first iPhone or iPad models. Chief Financial Officer Luca Maestri told The Associated Press that revenue from the watch amounted to “well over” that $952 million increase, as the category includes products whose sales fell. Apple has run television commercials showing the watch in everyday life, and it has devoted tables at its retail stores for people to try one on and learn more.

It came from a much deeper concern about Apple’s ability to keep dazzling–eight years after it introduced the iPhone–with its technology and design. “We think the iPhone has a lot of legs to it–many, many, many years,” CEO Tim Cook said after an analyst hinted the company was a little too focused on the iPhone. “We’re in the early innings of it, not the late innings.” Fine, except as any baseball fan knows, there can be some ugly things that happen inning by inning, even when you end up winning the game. Connected wirelessly to an iPhone, the Apple Watch isn’t meant to replace the phone, but rather provide tidbits of information readily while the phone is in a pocket or purse. David Lubarsky, a Fairfield, Connecticut, photographer, loves that he can get “basic information, quick” and avoid staring at Facebook on the phone all day.

The watch version of one transit app offers bus schedules for your saved locations — even if they are far away — rather than the stops closest to you at the moment, as the phone app does. Apps will get better when Apple updates the watch’s software this fall to permit more “native” apps — those that aren’t just extensions of phone apps. Of course, it didn’t help that Apple said that revenue this quarter would come in between $49 million and $51 billion, below the consensus estimate of $51.1 billion. Which is encouraging, but the broader fear among tech investors is that smartphone sales in general are slowing, having reached market penetration in many global markets.

Apple sold an estimated 2 million Apple Watches last quarter, assuming a median sales price of $499, which isn’t bad but also below the projections some saw of 3 million or more. But already this week we’ve seen IBM disappoint (in its ongoing painful transformation into the cloud), and then Microsoft somehow fall short of what investors wanted. Most of these disappointing earnings have less to do with a fundamental, widespread weakness among tech companies and more with a sense among investors the rally is peaking.

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