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Apple Inc. (AAPL) Stock Just Failed Its Q4 Earnings Test

Apple Inc. (NASDAQ:AAPL) just posted better-than-expected fiscal-fourth-quarter earnings but the market knew expectations were low, and it adjusted accordingly. Now, Apple stock is down a couple percent in after-hours trading, and that’s really no surprise.

In its recently completed fiscal fourth quarter, Apple earned $1.67 per share on $46.9 billion in sales. That marks AAPL’s third straight quarter of declining year-over-year revenue.

Apple was expected to report earnings of $1.65 per share on sales of $46.89 billion for the period ended Sept. 25. A year earlier, the company had earned $1.96 per share on revenue of $51.5 billion. Apple had previously offered revenue guidance of between $45.5 billion and $47.5 billion for the quarter in question.

CFO Luca Maestri, commented on the numbers:

“We are pleased to have generated $16.1 billion in operating cash flow, a new record for the September quarter. We also returned $9.3 billion to investors through dividends and share repurchases during the quarter and have now completed over $186 billion of our capital return program.”

But Apple stock holders weren’t pleased.

Apple’s Q4 Earnings Details and iPhone Figures

For better or worse, the results confirm what had been suspected: Apple is running into a headwind. Last quarter’s results mark the third consecutive quarter that iPhone sales fell on a year-over-year basis.

AAPL sold 46.5 million units of the popular smartphone for the quarter ending in late September. Apple stock analysts were expecting the company to sell 44.6 million of the device during fiscal Q4, 43% of which were supposed to be driven by new iPhone 7 and iPhone & Plus — even though the device was only available for the final two weeks of the quarter.

Still, Apple sold 48 million iPhones in the fourth fiscal quarter of 2015.

China was the expected sore spot as well. After generating $12.5 billion in revenue in the comparable quarter a year ago, Chinese sales slumped to $8.8 billion last quarter.

It was only a few months ago Tim Cook said, “I could not be be more optimistic about its (China’s) future.”

That optimism has thus far been unmerited.

Other Points of Weakness

While it matters considerably less than the iPhone 7, Mac sales rolled in below expectations at 4.9 million, versus 5.7 million units a year earlier. iPad sales fell from 9.9 million to 9.3 million units. That’s a better iPad figure than expected, but still not strong.

Last year, Apple teamed up with International Business Machines Corp. (NYSE:IBM) to launch new business-oriented apps for the iOS device, which had struggled to take market share away from the Windows OS environments most enterprises are familiar with. That effort hasn’t gotten a great deal of traction, however. Just this week it was announced that IBM was prepping a massive rollout of new Mac business machines, suggesting Apple has regrouped and is attacking from a different angle.

Although Apple didn’t provide specific numbers, the Apple Watch was also lackluster last quarter. That weakness wasn’t unique to Apple. International Data Analytics recently reported that smartwatch sales slumped 51.6% during calendar Q3, to only 2.7 million units. Apple’s market share slid from 70% to 40%.

That marketwide lull calls into question the strength of the category’s future, even though health insurer Aetna Inc (NYSE:AET) announced last month it would fund the purchase of the device for some of its customers. That validates the idea that the watch serves as a medical technology device, but it’s still unclear to what extent that demand will help AAPL shares now that rival smartwatches are readily available.

One bright spot for owners of Apple stock — the company’s service and app revenue. Last quarter, this division generated $6.3 billion worth of business. That’s up 24% from $5.1 billion in revenue in the fourth fiscal quarter of 2015.

Apple has been transitioning for years from a hardware-centric company to one less reliant on hardware and more driven by recurring revenue. That paradigm shift become semi-official in the middle of this year when the company changed its app store revenue model to one that encourages subscription-based apps. The introduction of a subscription-based music service is another step toward so-called “monthification” of its revenue.

Looking Ahead for Apple Stock

The only optimism Wall Street might draw from this report is in the outlook.

For the quarter currently underway, the company anticipates revenue of between $76 billion and $78 billion. Analysts were only looking for sales of $74.65 billion, down 1.6% on a year-over-year basis. That was expected to translate into a profit of $3.17 per share of Apple stock, down from $3.28 a year earlier.

However, that outlook may underestimate the benefit Apple experiences now that the Galaxy 7 Note smartphone from Samsung Electronics (OTCMKTS:SSNLF) is off the market due to a serious, and dangerous, design flaw.

The new Pixel smartphone from Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) is also a worthy competitor. But the iPhone is expected to earn the lion’s share of the business Samsung has ceded.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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