Why This Week's Apple Earnings Matter So Much More than Usual

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Monster Apple earnings in the December quarter would do wonders for Apple stock - but don't count on that happening.

Apple Inc. (Nasdaq: AAPL) earnings for Q1 2013 are due out Wednesday after market close, and Wall Street estimates range from a 14% decline to a 12% gain. Apple's own guidance is for earnings of just $11.75 per share, while the consensus on Wall Street is for earnings of $13.41 per share.

Even if Apple earnings match Wall Street expectations, $13.41 per share would actually be a decline of more than 3% year-over-year, a far cry from the stunning 118% gain the company reported last year. The psychological impact of declining year-over-year profits for the first time in nine years could ding the stock.

An actual earnings miss - even by just a few pennies - would be more dangerous for Apple stock, meaning the likelihood that Apple stock will fall after earnings is higher than usual.

Here's how Apple got in this vulnerable position.

Why Some Investors Have Soured on Apple

AAPL has been under pressure for the past four months, losing 28.4% on its way down to sub-$500 levels after peaking at $702.10 in mid-September.

Bad publicity, worries about stiffer competition among mobile devices, and negative reports hinting at slowing demand have soured many investors on Apple.

"Sentiment could not be worse," Peter Karazeris, an analyst at Thrivent Financial for Lutherans, told Bloomberg News. "It does take something fundamental to turn that, and we'll see if they can deliver."

Some reports indicate that Apple is struggling to keep up with iPhone 5 demand; others indicate that the iPhone 5 is not selling as robustly as earlier models.

But sales of the iPhone 5 - the product responsible for more than half of the company's profits -
are the linchpin of Apple's Q1 earnings. Strong sales would be reflected in good earnings and bode well for the rest of the year.

If the iPhone 5 numbers don't impress, though, it could means months of trouble for Apple stock.

"If iPhone 5 sales really are disappointing so soon in the product's refresh, then it seems fair to worry about likely sales volumes in the next few quarters before the iPhone is next refreshed," Nomura Equity Research analyst Stuart Jeffrey wrote in a note when he lowered his rating on Apple.

The heavily negative sentiment has placed more importance than most other quarters on a strong Apple earnings report, which could reverse the slide in Apple stock and send it heading back up toward $600.

"If you have a 10% to 15% beat on estimates, it will be enough to have people say, 'Oh, my gosh, Apple has its game back,'" Chris Bertelsen, chief investment officer of Global Financial Private Capital, told Reuters.

Apple Earnings: What Wall Street Will Be Watching

Apple's earnings will be even more closely scrutinized than usual as analysts look for clues on which direction the tech giant's business is headed.

Of course, Wall Street will also be watching closely to see if Apple sells the number of iPads it expects (23 million-25 million) and particularly whether the iPad Mini is cannibalizing sales of its larger sibling. If Apple sells a lot of Minis, that may still disappoint analysts because the smaller iPad has a lower profit margin.

Indeed, since Apple launched so many new products going into the December quarter, analysts expect lower margins all the way around. Overall, Wall Street expects a drop in margins from 45% last year to 38%.

Higher sales of iPad Minis and older models of the iPhone (which Apple sells at a lower cost and lower profit margin) could easily drop that number below analyst expectations, delivering another blow to Apple stock.

While there are more chances for Apple earnings to go wrong than right, optimists can take comfort in the fact that the company often defies expectations.

And despite all the gloom surrounding Apple stock lately, 48 of 58 analysts covering it still rate it a "Buy" or "Strong Buy."

The median price target remains a lofty $745. Most everyone also agrees the company is sound fundamentally.

"Three things influence a stock price: growth, value and momentum. The growth and value are there, but you've completely lost your momentum," Mark Mulholland, manager of the Matthew 25 fund, told Reuters.

Some bullish analysts remain hopeful that Apple earnings will somehow manage to surprise to the upside.

"We still expect iPhone growth. They are still pointing to a strong December quarter and, if you think there's any momentum left, that they can grow on the high end [of the smart phone market] or find growth in other sectors, this is a buying opportunity," Morningstar analyst Brian Colello told Reuters.

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