In the grand scheme of things, nobody was terribly surprised that Apple Inc. (AAPL) reported its first year-over-year decline in revenue last quarter. The market knew it was coming.
What was surprising was the size of the earnings and revenue misses. The consumer technology maker fell short of estimates by a mile (by Apple standards, anyway), sending AAPL stock down a hefty 8% in after-hours trading.
The $64,000 now: What next?
Is Apple stock a screaming buy now that it’s “on sale,” or do last quarter’s numbers make it clear that the once-great company has lost its magic?
Apple’s biggest, most outspoken fans have once again come to the company’s defense, but there’s only so much bullish spin you can put on poor results.
In its second fiscal quarter of the year, Apple earned $1.90 per share on revenue of $50.56 billion. Both figures fell short of expectations. Analysts were looking for a profit of $1.97 per share of AAPL stock, and sales of $51.51 billion.
Perhaps worse, the top line fell 13% from the year-ago tally of $58 billion, and per-share profits fell 18% from the $2.33 that Apple earned in its second fiscal of the prior year. It was the first time revenue fell on a year-over-year basis on over a decade.
The sore spots were the ones one might have expected … slowing iPhone sales, and waning demand in China. iPhone sales of 51.2 million units topped expectations but was still well off the 61 million it sold in the same quarter a year earlier, shortly after the then-new iPhone 6 was unveiled and was hitting its full stride. Meanwhile, sales in China fell 26%, to $12.49 billion.
Conversely, the company sold 10.2 million iPads last quarter, topping expectations of 9.4 million; the recently unveiled smaller iPad Pro was well-received.
Even so, iPad sales fell more than 20% from Q2 2015’s count.
Looking Ahead for AAPL
For the quarter currently underway, Apple expects to drive revenue of somewhere between $41 billion and $43 billion, well off the $47.4 billion analysts had been expecting.
The company isn’t publicly worried yet, however. CEO Tim Cook opined:
“The smartphone market as you know is currently not growing, however my view of that is it’s an overhang of the macroeconomic environment in many places in the world and we’re very optimistic that this too shall pass.”
Some observers who aren’t employed by the company, however, aren’t as optimistic.
- Moor Insights & Strategy analyst Patrick Moorhead commented: “Apple is going to be put in a position, in a defensive position of how they show growth, and this is an area that Apple has not had to do for the last few years.”
- Angelo Zino of S&P Global Market Intelligence offered something along the same lines, saying: “They need to come out with that next great product. “Apple absolutely needs to start diversifying their revenue base.”
- Piper Jaffrey analyst Gene Munster added: “Mar-16 results and Jun-16 guidance appear negatively impacted by a sharp deceleration in China as revenue from Greater China was down 26% y/y vs total revenue down 13% y/y. China grew 14% y/y in Dec-15. While iPhone was slightly ahead of the Street at 51.2 million, our early take on June guidance seems to imply 39-40 million units, down 16-18% y/y. Overall we see few bright spots in the March report and June guide…”
- Even so, Munster continued: “… but [we] continue to expect the iPhone 7 cycle will result in a return to growth in Dec-16. While shares are down given the disappointing report, we believe that optimism around the iPhone returning to growth will prove to be a catalyst to shares mid-2016.”
Bottom Line for Apple Stock
It’s increasingly difficult to deny that Apple is running into a demand headwind, partially driven by market saturation, and partially driven by a slowing upgrade cycle; consumers are seeing less and less of a difference in the iPhone. The evaporation of carrier-subsidized smartphones isn’t helping, either.
Regardless of the reason, Zino, Moorhead and Barclays analyst Mark Moskowitz — and others — are on to something when they say the iPhone simply lacks the “Wow!” factor it once had. Until that changes, mere perception alone could prove to be a drag on Apple stock.
Tim Cook needs a new game-changing product. Another next-generation iPhone isn’t it.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.