Look out below! Apple is down $55 after-hours as earnings disappoint

After closing at $514.01 in regular trading, Apple's earnings have shocked the investment community and the stock is now trading after-hours at about $459 for a better than 10% decline. And yet, you will read that Apple set records for quarterly revenue, quarterly earnings, the number of Apple iPhones sold and the number of Apple iPads sold. Where did the company go wrong?

One major area that analysts were not happy with was Apple's gross margins, which dropped to 38.6% from the 44.7% recorded last year. The average price Apple recorded for each Apple iPhone sold was $641.57, close to last year's number. But the average price received per iPad sold dropped from $568.16 in the 2012 quarter, to $469.93. That is the result of adding the lower priced Apple iPad mini. One margins start declining, they tend to continue dropping. This one piece of data alone should scare Apple as it shows that Android tablets are beginning to take share away from the iPad.

Maybe Apple executives don't get it. Tim Cook said during the conference call that the Apple iPhone 4 was "in constraint" during the entire quarter. But this is the lowest priced smartphone in Apple's lineup and is offered free with a two-year contract by some carriers. This lowers margins and reduces the average price of sold iPhones. Cook was making this sound like a positive when frankly, it is the kind of thing that Apple investors fear. This quarter could give the suits in Cupertino a reason not to produce a low priced version of the Apple iPhone as it would bring margins down even more.

Apple could nip this in the bud by using some of the $137 billion in cash it has, to buy back a chunk of stock. The best way Apple can do this and achieve the results they want would be to buy a percentage of the stock outstanding at a premium in a tender offer. This would have much more of an impact than merely buying shares in the open market from time to time.

We're not sure what will change the current feelings about Apple. we've pointed out over the last few weeks how there is a malaise surrounding the company and there is the question if Apple has lost its edge. Something has changed and as Bob Dylan once sang, "You don't need a weatherman to know which way the wind blows." Apple sold a record number of Apple iPhones and Apple iPads and still can't please the investment community. The best thing that Tim Cook can do is to blow up current plans for things like a low-priced Apple iPhone and even put talks with China Mobile on the backburner. Apple has always been a company producing innovative new products and different variations of the iPhone is not innovation. Selling more of the device in China is not innovation. It is time for Cupertino to put the ol' thinking cap on and wow us with something new.

source: Bloomberg, WSJ ,

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Analyst cites survey showing shift in Apple iPhone buying patterns in cutting earnings estimates

According to a survey by Consumer Intelligence Research Partners, a significant change in Apple iPhone buying patterns is taking place. While buyers of the Apple iPhone 4S averaged 30GB of storage, buyers of the Apple iPhone 5 are averaging 20GB of storage with fewer buyers selecting the 64GB model. In addition, demand for older models is now 50% during the Apple iPhone 5 cycle, compared with 33% during the cycle of the Apple 4S. This shift to lower priced, lower storage versions of Apple's iconic smartphone have led at least one analyst to cut his earnings estimates for Apple.

UBS analyst Steven Milunovich says that this shift to lower priced units combined with higher launch costs could cost Apple a reduction of 8 to 10 percentage points in gross margin in fiscal year 2013. As a result, the analyst now expects fiscal year 2013 profit of $44.68 a share, down from $47 previously estimated. For fiscal year 2014, he sees Apple reporting profit of $52.80 a share, down from his earlier forecast of $55.85 a share. Milunovich has cut his target on Apple's stock to $650 from $700 while keeping his "Buy" rating on the shares.

Milunovich see's a 2% to 6% drop in the phone's average selling price over the next three quarters, reducing his gross margin forecast by 1% over fiscal year 2013. His buy rating is based on a positive risk/reward ratio at current prices. He sees strong growth, a deal with China Mobile by the fourth quarter, and too much pessimism about Apple losing its edge in innovation, pushing the stock higher.

source: CIRP via Forbes

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