The Never-Ending Mystery of Earnings Season and Other Apple Matters

Riddle me this stock market.

Company A, which competes in one of the worst-performing sectors of 2011, reports a quarterly loss of minus $428 million, which was ( -$0.84) per share, and revenues which miss analysts’ estimates by 22% and are 60% below the prior year.

Company B, which competes in one of the hottest sectors, reports an EPS of +$7.07, reflecting year over year revenue growth of +39% and year over year earnings growth of +54% (but does narrowly miss analysts’ forecasts).

Company A trades up +5.5% the next day and Company B trades down -7.2% over the next few days.

Makes perfect sense, doesn’t it? Of course we are talking about Goldman Sachs and Apple.

The reasons for the disparate stock performances are numerous and we will just hit the most obvious:

• The already beaten down GS stock, which was off -48% on the year going into earnings and the belief that the “worst was over” in terms of highly punishing recent markets and adverse business conditions.
• The fact that AAPL has typically crushed earnings estimates and this was the 1st quarterly miss in 7 years, combined with some softer than anticipated iPhone sales. Not to mention the stock’s recent run to all-time highs and roughly +30% increase in 2011 just prior to earnings.

But what we really would like to talk about is the very interesting reaction coming off the “big earnings miss” for Apple as it relates to Chief Executive Officer Tim Cook.

Mr. Cook had been Apple’s interim CEO three times, in 2004, 2009 and 2011, prior to taking on the role for good in August 2011on Steve Jobs’ resignation due to health reasons. Mr. Cook has been with Apple since 1998 and is widely credited with the fact that AAPL’s price structure and margins are the envy of the tech industry.

Here is a quote from one high-level Apple insider:

However, we have heard and read several interviews with industry analysts and tech “experts” who have openly questioned whether Mr. Cook is the right choice as AAPL’s CEO and speculated that his run might be shorter than expected. These experts tend to focus on the fact that a company like Apple, given the brand heritage it has developed, needs another “creative visionary” at its helm rather than a “nuts and bolts operations guy”.

“While Tim Cook is clearly a decent and talented man, he isn’t Steve Jobs. And that fact alone may be enough to affect Apple’s share price considerably. It could be that Apple has reached its pinnacle, and that the end of Jobs’ reign as CEO means the company may start the long road down the other side of the mountain peak it has just scaled.”

The most ridiculous argument we have heard focuses on the fact that Mr. Cook is “0 for 2” as CEO, referring to the market’s initial “sell-off” reaction to the 4S iPhone product launch meeting on October 4, 2011 (expecting a new iPhone 5) and now the earnings miss.

Those “negative” reactions to the 4S iPhone were quickly dispelled with the record-breaking sales for the actual in-store launch and the guidance from AAPL in its earnings release for Q1 EPS and revenues well above street estimates (breaking with the tradition of “sandbagging” the numbers, although this could actually be the ultimate sandbagging.)

We think the jury has to be out for several years to see how AAPL’s product development pipeline performs without Mr. Jobs’ grand influence. But it is safe to say, we think, that sales, revenue and earnings results will be strong for the foreseeable future.

Here is a look at some of the components of the 4th quarter earnings report which are fairly encouraging to say the least, with the exception of a slowdown in the maturing iPod market:

• iPhone sales: 17.07 million units, a 21 percent growth over the year-ago quarter (and not reflecting the 4S)
  
• iPad sales: 11.12 million units, a 166 percent growth over the year-ago quarter
  
• Mac sales: 4.89 million units, a 26 percent growth over the year-ago quarter
  
• iPod sales: 6.62 million units, a 27 percent decline from the year-ago quarter. Half of the units sold were iPod touches.
  
• OS X Lion sales: 6 million downloads. Lion is newly released so there are no quarter over quarter comparisons.
  
• iBook downloads: 180 million iBooks downloaded from the iBookstore
  
• Apple Store revenue: Average Apple Store location earned $10.7 million in revenue
  
• Apple store visitors: 77.5 million visitors in the fourth quarter
  
• Cash on hand: $81.6 billion, with cash flow from operations totaling $10.4 billion

So, add these kind of results to the rate of the 4S iPhone sales so far, and this AAPL earnings “miss” may become a distant and forgettable memory in three short months. But given the heated competition from companies like Amazon and Google, we think the concerns over “vision at the top” are not necessarily something to take lightly in the long-term.

Good Trading!
David W. (aka The Underground Trader)

 

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