High Expectations Weigh On Apple Stock Post Q3 Earnings

  • Apple shares have tanked after the company delivered good Q3 earnings but issued guidance that failed to meet heightened expectations.
  • It appears as if the investing world has raised the bar too high for Apple.
  • Apple stocks remain a good long-term investment on the back of strong iPhone demand.
Apple earnings Q3 2015

Well, it appears there are some things that not even mighty Apple (NASDAQ: AAPL) can pull off, such as placating hard-to-please investors with ever-growing expectations. The Cupertino giant’s stock price fell as much as 8% in after-hours trading even after the company managed to deliver yet another blowout quarter driven by robust iPhone sales. Apple earnings report for Q3 2015 was glittering by any yardstick: the company reported revenue of $49.6 billion, up 33% compared to the prior year period, and EPS of $1.85 per share representing 44.6% Y/Y growth and beating consensus analyst expectations by 4 cents. iPhone sales jumped 35% to 47.5 million units while iPhone revenue grew 59%. Mac sales were up 9% to 4.7million units while iPad sales continued on its downward spiral to 10.9 million units, a large 18% Y/Y decline. Falling iPad sales, however, has long been priced into Apple’s stocks and were therefore not the reason why the shares got hammered.

Meanwhile, Apple gross margin improved 30-basis points to 39.7% compared to the prior year. This metric got a boost from iPhone ASP which improved by $99 to $660 thanks to strong sales of the newest models iPhone 6 and iPhone 6 Plus. Apple introduced the iPhone 6 Plus in September, and the healthy improvement in ASP is an indicator that the model has been selling well. iPhone 6 Plus sports a price $100 higher than the iPhone 6. That was a notable departure from the company’s historical trends where iPhone ASP has declined by an average of 5.2% every year. Apple reported that 27% of users had upgraded to the new models so there is still plenty of room to run.

Apple did not break out sales of the new Apple Watch, but lumped up sales of the product under the ‘‘Other’’ Category together with Apple TV, Beats headphones and the iPod. Sales for the category came in at $2.6 billion. Apple Watch sells at different price points of $350, $1,000 and the high-end $15,000 model. It’s therefore a bit hard to work out sales numbers of Apple Watch using the available information provided by the company.

Apple's China Story Gets Even Better

But perhaps the biggest highlight from the June quarter, and Apple’s biggest victory, was the ringing success of its iPhones in China. Apple reported that China revenues more than doubled--up 112% during the quarter. The company lumps together sales in Taiwan and Hong Kong under this category. China has therefore become Apple’s second-largest market after the US, and the company’s fastest-growing. Apple now makes more than 25% of its revenue from China and at current growth rates might leapfrog the US as the company’s largest market in about a year (the US accounts for 36% of Apple revenue).

Tepid Outlook For Apple Q4 Earnings

But despite the glowing report, Apple still came short on some counts. Analysts were expecting iPhone sales of 50 million units, which would have been a 42% jump compared to the previous quarter. But what really undid Apple’s stock price was the company’s ‘‘tepid’’ outlook: Apple reported that it expected revenue of $49 billion-$51 billion which came in shy of $51.1 billion consensus by analysts. The fact that Apple decided not to disclose sales of Apple Watch also raised a red flag in the investing world which took it to mean the new devices are not selling as well as hoped earlier.

Unrealistic Expectations

It’s becoming increasingly hard for Apple to meet ever-growing expectations, and this is beginning to weigh in on the Apple stock performance. The fact that Apple stock price tanked by such a large margin on the back of an otherwise healthy report appears quite surprising given that short interest in Apple shares was close to a record low coming into the earnings season. Apple seems to be in a Catch 22 situation where it ends up losing even when it wins. Cannacord Genuity recently released a report that showed that Apple accounted for 92% of profits by the smartphone industry and 50% of PC profits during the previous quarter. With improving iPhone ASPs, the company’s dominance is bound to extend even further. But this seems to be lost on investors.

Long-term investors, however, need not worry. The continued strength of the iPhone will help offset any weaknesses in Apple’s new products, some of which will inevitably fail to take off as anticipated. Apple now derives 70% of its revenue from iPhone sales up from 50% a few years back. As long as the company keeps churning out a marquee line of iPhones, good long-term performance of Apple stock seems assured.

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