Apple (AAPL) reported its third quarter earnings on Tuesday and was promptly hammered with downgrades and negative financial news articles. This morning, the stock is down nearly five percent. Is it time to sell Apple stock?
See here for the Finance Gourmet’s analysis of Microsoft’s first quarterly loss.
Apple’s Earnings Facts
It seems that Apple has maybe gotten too good at living up to people’s expectations. Last year’s iPhone release of a modestly upgraded iPhone 4S, which basically was a small upgrade that added the voice assistant Siri. That, plus Apple’s track record of releasing a new iPhone roughly once per year, has left many iPhone buyers waiting for the still unannounced iPhone 5. All of those customers not buying iPhones this quarter dented Apple’s earnings.
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Here is where things get a little weird. Everyone already knew that the demand for iPhone 4 was lessening in the face of increasing belief that the next iPhone was just a few months away. Couple that with the 2-year contracts that the carriers slap on every new iPhone purchase and you get people who don’t want to get “stuck” with the “old” iPhone when the new one is coming soon. Analysts already expected lower sales, approximately 28 million, but sales were even lower, at 26 million.
Sell Apple Stock Now?
If everyone knows that Apple will have big iPhone sales when the iPhone 5 comes out, and everyone knew that there was going to be a slowdown, then why is the stock down?
Apple’s stock has long been priced to perfection, meaning that the stock price reflected a belief that everything in the future would go just as well as it has so far, without any blips or hiccups along the way. Today was the first hard data that casts doubt on that scenario.
What if the combination of new phones and 2-year contracts means that Apple’s sales are now tied to market forces beyond its control? Has it finally hit a ceiling in how much iPhone sales can grow?
Another issue is that Apple has a long track record of issuing laughable guidance which is then crushes when it releases earnings. Apple beat its own guidance this quarter, but it didn’t exactly crush it. Does that mean that this quarter went worse than expected?
Does all of this add up to a sell recommendation on Apple stock?
So far, no analysts are downgraded the stock like that or recommending that anyone sell it. However, there have been cuts to the amount of growth Apple is expected to have.
Keep in mind that an increasing stock price requires (eventually) a company that is increasing in value. If, hypothetically, this is as big and profitable as Apple can get, then its stock price should stay at this amount forever (excluding inflation).
Should you sell?
If you believed in Apple stock yesterday, you have no reason to not believe in it today. However, the reality that Apple stock won’t double again next year or maybe even in the next several years should be sinking in. Adjust your expectations and you should be fine.
If you’ve been looking for a chance to buy into Apple stock, this is it. The company should have huge sales demand pent up when the iPhone 5 is released, and there are more products and upgrades in the pipeline. Expect the stock to recover and runnup if the new products are even a modest hit.
Beware Apple Stock
However, there is an important caveat to all of these good thoughts. The next Apple products must be good. Specifically, Apple’s next products need to be better. Since Tim Cook took over as CEO all of Apple’s product releases have been incremental upgrades. That is, the products have been improved, but not changed. The iPhone added Siri, and the iPad got a Retina display, but they are still basically the same products. Without a new hit driving mega-sales, there is always the possibility that current owners will just keep the products they already own as “good enough.” Then Apple becomes just another tech company living off of replacement sales and the time to sell your Apple stock will be before everyone else notices that.