For the third straight quarter Apple has failed to meet Wall Street’s expectations. Apple’s most recent failure is trumpeted from every analyst, prognosticator, headline, webpage, and TV screen.
What they’re not telling us is that the rules to the game have changed, and Apple is a victim.
Hidden In Plain Sight
What’s going on is obvious but not talked about too much in the financial arena. Apple has had a good decade. First, the iPod, then iTunes Music Store, iPhone, and iPad set the standards.
Apple would offer guidance to Wall Street for the upcoming quarter, and then, because sales of everything with an Apple logo on it grew faster than predicted, Apple would blow through the numbers.
Quarter after quarter the same scenario played over and over. Wall Street came to expect that Apple would offer conservative guidance for the next quarter, introduce a revolutionary, disrupting product every year, and then exceed even Wall Street’s inflated expectations.
That was then, and this is now. The best Apple can do these days, under the reign of CEO Tim Cook, is exceed their own conservative guidance– buy a little, but not enough to impress anyone.
Apple’s once high-flying stock, which catapulted the company’s value to another planet, has shed value faster than people lined up to follow Noah onto the ark.
How much shedding? Just yesterday Apple’s stock dropped by a market value of two RIMS and two Nokias.
Bad Numbers Everywhere
What horrible sin has Apple committed? It has little to do with numbers and everything to do with expectations. Apple just reported record revenue, record profits, record iPhone sales, record iPad sales, and record weekly revenue that was almost 30-percent higher than last year.
And that’s bad why? Because Wall Street has changed the rules of the game. Apple is not doing anything different this year than last, and didn’t do anything different last year than years past. Record revenue, record profits, record product shipments just don’t mean what they used to mean.
Wall Street values risk takers like Amazon, cash cow milking machines like Google (the former doesn’t make money, and the latter has only a single leg on the stool, but still…). Apple, once a Wall Street darling, is on the outs because it’s been three long years since the company disrupted an industry.
The rules have changed for Apple. Wall Street doesn’t want stellar financials. Microsoft has turned massive profits for the past decade but the stock price remains flatlined. Apple’s stock was driven into the stratosphere by the market, and the same market has turned on the company for merely repeating the quarterly performance.
DoubleLine CEO Jeff Gundlach.
I think this is really a broken company that is over-owned.
Translation. The sky is falling. Sell now.
Yes, I know. That’s absurd. And that’s how Wall Street works. What’s really broken with Apple? The company’s inability to surpass overinflated expectations. It’s as simple as that. Almost.
The Post-PC Era vs. Law of Big Numbers
Not much attention was paid to Apple’s Mac sales. The year before, in the same quarter, Apple sold 5.2-million Macs. This past quarter, Apple sold 4.1-million Macs. That’s a huge drop. Part of the difference is attributed to the number of weeks in the quarter, 13 vs. 14. Even adjusting the weeks to comparable math, the Mac sales drop herald a new event.
The post-PC era is here and in force. Apple sold over 22-million iPads, but just over 4-million Macs.
As you rummage through the Chicken Little headlines and what passes for analysis from Wall Street and tech pundits, note that Apple’s revenue and profits did not drop. They are at record levels. So, why all the sky-is-falling shouts?
Revenue and profits are slowing down. They’re growing slower as a percentage over previous growth rates. Rates. Not actual numbers. Once a company hits $100-billion in annual revenue, growth of 20-percent requires another $20-billion in revenue in just a year. That kind of growth rate is difficult to maintain, regardless of how stellar the finances.
Regardless, the drop in Mac sales is a watershed moment. Desktop and notebook PCs won’t disappear from the face of the earth any time soon, but the world is moving rapidly toward mobile devices, where, interestingly, Apple sits in a better position with iPhone and iPad than it ever, ever did with the Mac.
The Crazy Argument Crowd
With Apple on the ropes, against the wall, and being dragged across the coals of ridiculous analysis, be prepared for the craziest round of What Apple Must Do Now opinions you’ve ever heard or read.
Here’s a few examples of crazy.
‘The iPhone 5 hasn’t caught on‘ because it only accounted for half of Verizon’s iPhone sales in the past quarter. Yes, supply has been constrained. But amid the calls for Apple to make a cheaper iPhone, the two cheaper iPhones– iPhone 4 and iPhone 4S– seem to be selling well at Verizon and AT&T.
No one wants to talk about the fact that the iPhone line outsold the Android line in the U.S. by about 2 to 1. Wall Street can’t mention that because it doesn’t fit the Samsung-is-the-new-Apple narrative. What’s perplexing about Apple’s soured relationship with Wall Street is why the obvious seems so well hidden to analysts, technology media, and Apple critics.
That said, could Apple benefit by having an entry-level, unlocked, lower priced iPhone model? Yes. Maybe not in the U.S., but certainly in countries where carriers don’t subsidize smart phones.
‘The iPad mini is being beaten by Google and Amazon.’ Beaten how? Price. Forget the fact that the iPad outsells cheaper tablets, and remains inventory restrained. Apple is required to match competitor’s hardware bullet points to be considered worthy, despite the fact that Apple has never worried much about competing with any product on bullet points (RAM, storage, price, CPU, et al).
That argument alone is crazy nonsense. Google, Amazon, and Samsung do not release sales unit numbers for their competing tablets. Somehow, Wall Street has decided that the true mark of a company has little to do with financials, and more to do with hubris and attitude than financial performance.
Apple, under co-founder CEO Steve Jobs, had plenty of bravado, hubris, and attitude, perhaps manufactured within Jobs’ famous reality distortion field. Tim Cook, the man who makes everything work, is a seasoned, experienced, and highly capable executive, but he lacks Jobs’ hubris gene, and Wall Street seems to be in love with bravado these days. Witness Google’s CEO, Amazon’s CEO, and others who regularly taunt Apple, attempt to be Jobs-like in public demeanor, but have yet to show they can disrupt an industry and make a profit at the same time.
Until Apple disrupts television or clothing or electricity, it’s likely that Wall Street will continue to treat the company the way it has treated Microsoft in recent years; with disdain and disrespect. The only problem is that Microsoft, while profitable, has failed to disrupt and create new industries, while Apple does it every few years. And Apple is due.