With Apple stock falling 5.59% yesterday (Wednesday) to close at $398.62 following an uncharacteristic earnings miss Tuesday, the company has lost its aura of invincibility.
Apple delivered $7.03 a share on $28.27 billion in revenue but analysts had expected earnings of $7.28 a share on revenue of $29.45 billion.
"The implications of an Apple miss means more than is typical, given the importance of its auraof brilliance in sustaining premium price points and product loyalty," Alex Gauna of JMP Securities wrote in a research note. "This will likely also add to well-placed investor anxiety around how the company sustains its momentum under new leadership."
The earnings disappointment - Apple's first since the second quarter of 2002 - was just one of several recent bruises suffered by the Cupertino, CA-based tech giant.
Concern started brewing in August when Steve Jobs resigned as CEO, but Jobs' death from pancreatic cancer earlier this month seemed to rob Apple of some of its magic.
Then the Oct. 4 introduction of the iPhone 4S was met with disappointment because it wasn't the much-rumored iPhone 5.
The series of stumbles has Apple investors wondering whether their days of huge gains are over. But the emotional reaction to Apple's earnings is a mistake.
"While the Q4 miss - following management transition - may restrain near-term investor sentiment, we think the new management team should be given its opportunity to show what it can do," RBC Wealth Management analyst Mike Abramsky said in a research note.
Abramsky also pointed out several strengths that show why abandoning Apple stock now would be premature: "Apple's key franchises (iPad, iPhone) remain early and underpenetrated, with significant growth drivers (4G, China, emerging markets, enterprise, etc.) ahead," he said.
In fact, a comprehensive look at the company's fundamentals as well as its prospects shows that there's still tremendous potential for growth.
Enviable NumbersLet's start with the "disappointing" third-quarter earnings. True, Apple missed analyst expectations, but it easily beat its own guidance of a $5.50 a share profit on $25 billion in revenue.
And Apple's year-over-year performance - revenue growth of 39% and profit growth of 54% --would be the envy of any large company. In fact, it was Apple's second-best quarter ever.
Gross margins were 40.3%, up from 36.9% a year ago. The company now has $81.6 billion in cash, which accounts for about $88 of the stock price.
And while some analysts thought Apple should have sold more iPads and iPhones in the quarter, sales of iPads were up 166% year-over-year, while iPhone sales were up 21%.
Mac sales, which analysts generally ignored, were up 26% -- six times the rate of growth for the overall PC market in the quarter.
But can Apple keep it up?
The short answer is yes. The next earnings report should do a great deal to restore confidence in Apple stock - it will smash all records.
CEO Tim Cook's guidance for the December quarter was for earnings of $9.30 a share on revenue of $37 billion, with profit margins staying around 40%. For a company that historically lowballs on guidance, those are breathtaking numbers.
Going for GrowthWhen multinational corporations get as large as Apple, sustaining growth becomes more challenging. But Apple is nowhere near hitting the wall on growth.
Nearly every product, save for the iPod, is on track for a sales increase.
Take the iPad, for example. Apple has 73.4% of a market that is growing exponentially. Gartner, Inc. (NYSE: IT) predicts tablet sales will increase to 900 million by 2016 from 17.6 million last year. Even with increased competition, that's a lot of iPads.
And while the lagging iPhone sales from the September quarter was a focus of concern, a lot of that can be pinned on the delay of the iPhone 4S, which sold 4 million units in its first three days.
Earlier this month, Janney Capital Markets analyst Bill Choi said that Apple's continually expanding distribution network could help drive iPhone sales to 107 million units in 2012, a 27% increase over the 84 million expected to ship this year.
Like other global corporations such as McDonald's Corp. (NYSE: MCD) and General Electric Co. (NYSE: GE), Apple is also rapidly expanding into world markets, particularly such BRIC countries as China, Russia and Brazil, where it has until recently had only moderate success.
"Apple's ongoing penetration ofChinaand other emerging markets likely can be measured in years and stands to have a significant, positive impact on the growth profile," JPMorgan Chase & Co. (NYSE: JPM) said in a research note.
During Tuesday's earnings conference call, Cook said that sales to China accounted for 16% of company revenue in its 2011 fiscal year - up from 12% in 2010 and just 2% in 2009.
"We're also placing additional focus on some other areas that have shown great promise over this fiscal year, such as Brazil," Cook said. "Brazil was up 118% year-over-year and went over the $900 million mark. Russia is also beginning to look more and more promising."
With so much growth potential, Apple stock still has significant upside. Most analysts that follow the company all maintained their lofty price targets, ranging from $455 to $666.
"We believe the AAPLmodel is not broken, the story is far from over (e.g., 5% unit share ofglobal handset and computing markets) and expect the stock to makenew highs before year-end," ISI analysts observed.
Of course, if you're looking to invest in the company's prospects you may still be able to do better than Apple stock per se. In fact, the Oct. 10 issue of Money Morning Private Briefing had the inside story on a company that supplies technology for use in both the iPad and iPhone. Better yet, that stock is currently trading at a serious discount. For full information on this stock pick, click here to sign up for Private Briefing.
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