Earnings miss raises question: is Apple too reliant on iPhone?

Apple’s stock fell in after hours trading following its fiscal third quarter financial results announcement.

The stock closed at $600.92 just before the company announced itsfinancial results for its third fiscal quarter of 2012, but over nightit fell as low as $568.80 after-hours trading. That’s a 5% fall.

The reason for the loss of confidence was high hopes for the company’searnings, and in particular, great expectations for iPhone sales, thecompany’s biggest product.

Analysts, on average, were expecting Apple to achieve revenue of around$37.2 billion and earnings of $10.37 a share, according to ThomsonReuters. The company announced quarterly revenue of $35.0 billion andquarterly net profit of $8.8 billion, or $9.32 per diluted share. WhileApple said revenue rose 22.6% compared to a year earlier, growth wasactually down from 59% in the previous quarter.

This is the second time in 39 quarters that Apple has reported resultsthat missed analysts’ profit and revenue expectations. The previoustime was for quarter that ended September 2011, and as is the case now,lower than expected iPhone sales were blamed.

And the next quarter doesn’t look any more positive. The companyexpects to see revenue of $34 billion, and profit of $7.65 a share forthe next quarter, ending in September, most likely before the nextiPhone is announced.

The results sent shockwaves through the markets, not just in the US,but also in Asia where the Nikkei Stock Average dropped 122.19 pointsas component manufactures for Apple products faced pressure: Sharptumbled 10% to Y260; Toshiba fell 7.3%; LG Display dropped 4.8%; Sharplost 10%; and Hon Hai Precision declined 4.3%.

The reason for the impact is Apple’s status as the largest company bymarket cap; any decline in Apple stock tends to be amplified, notesCNBC.

CCS Insight analyst John Jackson told The Telegraph: “Apple is in thatrarest of all positions where the Street will punish them for anythingless than an excess of success.”

Synovus Trust Co senior portfolio manager Daniel Morgan told Bloomburg: “We have become spoiled by Apple and what they have done in the past. It’s just inevitable that you’re going to have some numbers that disappoint people.”

The Apple stock has been attractive toinvestors because it wasconsidered that, despite the harsh economic climate, Apple madeproducts, such as the iPhone that were so popular that people would buythem regardless. The fall in revenue has raised concerns that thisisn’t the case. Although, others suggest that the slowdown is due tothe anticipation that Apple will announce a new iPhone in the autumn.

Whatever the reason for the decline, Apple itself noted the economicsituation – specifically in Europe – as a factor in its disappointingresults this quarter. Cook did say that the company hadn’t detected”any obvious economic issues” from the US or China, however.

Trader Tim Seymour told CNBC that the repercussions of the lower thanexpected results due to the economic circumstances could see moneymanagers pulling out of Apple’s stock. He suggested that they mightsay: “If Apple is not immune (to the malaise) then I’m out of themarket. I don’t need to buy anything.”

Regardless of this, Capital Advisors Growth Fund co-manager ChanningSmith, seems bullish about Apple’s ability to defy the economy. He toldThe Telegraph: “Looking forward, obviously the global economy isweakening but history tells us Apple performs very well throughout anytype of economic environment.”

Many analysts note the economic environment in their assessment ofApple’s results. Cross Research analyst Shannon Cross told TheTelegraph: “It reflects a lot of the economic challenges we’re hearingform a number of players out there, with regard to the strength of theconsumer. There’s probably also some currency pressure on the top line.They sell in Europe and the euro has weakened substantially. Given theeconomic uncertainty they’re probably being cautious about theiroutlook. They’re still a very strong company. This is still not anexpensive stock.”

Alekstra analyst Tero Kuittinen agreed that Europe may have impacted,but also noted the increased competition from Samsung:”European salesdipped by a very surprising 6 percent sequentially. The combination ofSamsung’s big roll-outs and suddenly weakening European consumer demandin June created some issues,” he told The Telegraph.

The lower than anticipated iPhone sales is perhaps taking the mostblame for Apple’s disappointing results.A slowdown in iPhone sales issignificant because it is Apple’s biggest selling product, bringing inthe most revenue for Apple.

Does this suggest that Apple is too reliant on the iPhone? North ShoreAsset Management LLC portfolio manager Michael Obuchowski toldBloomberg “Pressure is mounting. Because everybody else has a muchfaster design cycle, Apple has to come up with a new phone that’scompetitive not just when it comes out, but will stay competitive for along period of time. That’s going to be increasingly difficult.”

Strategy Analytics executive director Neil Mawston believes the nextiPhone is “really critical for Apple,” because other devices arecatching up with the iPhone. Apple’s biggest competitor in this market,Samsung has already eclipsed Apple in smartphone shipments in the firstquarter of this year. Samsung achieved a 29% market share compared toApple’s 23%.

iPad’s lead still strong
Mawston also told Bloomberg that the next iPhone will have to becompatible with the latest fourth-generation wireless technology. Thismay cause problems, because there are various standards of 4G aroundthe world. For example, the iPad uses a variety of 4G that is onlycompatible with the US network and doesn’t work anywhere else.

The next quarter is also likely to be disappointing as we are unlikelyto see a new iPhone before the end of September when the next quarterfinishes. However, analysts have high hopes for the October, November,December quarter (always a good one for Apple). Virtus chief marketstrategist Joe Terranova said: “I’m looking forward to the Decemberquarter and then the March quarter. In December I expect to hear iPhonesales are north of 50 million – an historic high.”

Capital Advisors Growth Fund’s Channing Smith agrees that once Applelaunches the next iPhone matters will improve. He said: “We expected alot of consumers will probably delay their upgrade and their purchasesuntil the iPhone 5 comes out. So I’m not too worried at this point.”

CCS Insight analyst John Jackson added: “If there’s a positive spin onthe iPhone story, it is one of latent demand. The broad consumer marketis sufficiently tuned in at this point to expect something in the fall,so the shortfall is really consistent with what you would expect. Asexpected, Apple continues to defend and extend its leadership in thetablet space – a space it essentially invented and continues to own” hetold The Telegraph.

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