5 Reasons Apple Could Defy Skeptics In 2013 Despite Q1 Earnings Miss


Thanks to a rare earnings miss in its fiscal first quarter, Apple shares are falling nearly 11% in after-hours trading, to $458, after rising almost 2% Wednesday before the close. Investors were disappointed in particular that iPhone sales weren’t stronger and that Apple’s second-quarter forecast came in lower than analysts expected.

During the analyst call, CEO Tim Cook took pains to point out that the results were “extraordinary” and that Apple would continue to focus on producing industry-leading products. “No technology company has ever reported these kinds of results,” he said in opening remarks. “We’re unwilling to cut corners. This will always be the driving force behind Apple. … Everyone here is laser-focused on creating an unprecedented customer experience.”
Still, as the earnings call proceeded, investors grew even more bearish, as shares that initially were down 4% continued to fall in extended trading. Update Thursday, Jan. 24: And they didn’t feel any better after sleeping on it. The morning after, shares are down almost 12%.

Given the company’s and the stock’s incredible run in recent years, a pullback may be inevitable. But there are several reasons to think that Apple could do better this year than the skeptics currently believe:

* Its financial guidance may be purposely conservative: I’m not sure even Apple cares to manipulate its stock price to create a buying opportunity, as some analysts seem to believe. But it is customarily conservative. The difference may be that at a time when doubts about Apple’s prospects are rising and the stock is already off 30% from its peak, investors may be inclined to believe lowball estimates and punish Apple for them.

What’s more, this quarter and going forward, Apple is changing how it presents forecasts, moving from a point prediction that it was comfortable it could meet (and which it almost always beat, by the way) to a range that it’s comfortable it will hit. One analyst on the call, at least, was struggling to understand how to interpret the change, and Apple CFO Peter Oppenheimer didn’t offer much help, which may make analysts themselves more conservative.

Competitive concerns aren’t unfounded, and no company hits home runs every time. But it wouldn’t be surprising to see Apple outdo its own dampened expectations once again.

* Recent reports that Apple has reduced orders to suppliers, assumed to indicate that the company expected sales growth to ease, look iffy. Cook himself said it would be “good to question the accuracy” of such reports. He also said that any order changes could be due to other factors than anticipation of slower sales, such as better manufacturing yields.
* New products look promising: Despite expectations that the iPhone 5 could mark a peak for smartphone sales and therefore for Apple, it’s quite possible that new products–perhaps aimed at the world masses who can’t afford an existing iPhone–could delay a decline. Indeed, there are various reports of a cheaper iPhone for emerging markets.

And that’s just the start. Analysts expect several new iPhones, including one with a bigger screen–one of the chief shortfalls vs. Android devices–for the next holiday season. Cook noted during the call that the iPhone 5 does feature a larger screen size, but not surprisingly provided no clues to whether Apple might produce an iPhone with an even larger screen.

There will likely be a new iPad mini, perhaps with a Retina display. Not least, rumors continue to swirl about an Apple television, and while I’m doubtful that even if it does materialize it will mean significant sales this year, even a new Apple TV device with better integration with live TV and cable would create a lot of excitement.

Not least, it’s clear that Apple is willing to come out with products that will replace its own if necessary, such as iPads supplanting personal computers. “I see cannibalization as a huge opportunity,” Cook said on the call. And clearly more products will continue to come, perhaps even at an accelerated pace. “We’re working on some incredible stuff,” Cook said on the call, for what it’s worth. “We feel great about what we have in store.” Added Oppenheimer, “We feel very confident in our new product pipeline.”

* Apple’s ecosystem of standards-setting products, third-party apps, and retail stores still present a fearsome competitive advantage. Apple said on the call that it will continue to invest heavily in retail stores, which no other rival has. And that operation has a new chief who replaced one that Cook himself had appointed just nine months earlier, so Apple stores clearly remain a big priority–and thus a big competitive edge.

* Tim Cook isn’t Steve Jobs, but he’s no idiot either: Another reason some investors seem down on Apple’s shares is that some analysts aren’t sure Cook can keep the juggernaut going without Jobs’ famous reality distortion enhancement field. No one was better than Jobs at making sure Apple products were elegant packages with magnetic appeal, and even when they fell short of rival products, he was adept at deflecting criticism.

Cook has been criticized for failing here, either with clear mistakes such as letting a faulty maps app through, or simply by not coming up with an iPhone or other product deemed as exciting as previous models. Some say this kind of thing wouldn’t have happened under Jobs, and even that Cook should be fired.

That assessment seems both early and harsh, especially since Jobs didn’t do everything right either. Apple’s size and the scope of its manufacturing needs means that a strong operations chief like Cook is essential. And if his more creative folks such as Jony Ives, senior VP of industrial design, can continue carry on the design and product conception brilliance of Jobs, that could continue to keep Apple humming.

Nothing’s guaranteed, even for Apple. And who knows what the company’s share price really should be? Analysts are cutting estimates and target prices. S&P Capital IQ’s Scott Kessler, for instance, cut his 12-month target price from $665 to $600, but he’s retaining his strong buy rating. “Despite results we see as disappointing, we view AAPL as having strong franchises and growth opportunities,” he wrote in a note to investors. Indeed, despite today’s rampant doubts, it seems premature to assume Apple’s long run is over.

Source: Forbes Tech Robert Hof 1/23/2013 @ 6:22PM

Learn more about Ron Sloy.


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