Apple has put together one of the most amazing runs in corporate history, so when the company reports earnings results that miss expectations, it’s tempting to look for a grand narrative about the tech juggernaut. Are consumers starting to cool on Apple’s products? Is Apple’s incredible streak over? Is the sky falling? Nope. Although weakness in Europe played a factor, the main reason for Apple’s earnings miss on Tuesday was the simple fact that many consumers are holding out in anticipation of a new version of the company’s signature product, the iPhone, due out some time this fall. Apple shares declined more than 5% after-hours on the lackluster earnings report.
Apple reported sales of $35 billion, below Wall Street expectations of $37 billion, and net profit of $8.8 billion, or $9.32 per share, below Street estimates of $10.36 per share. Still, those numbers represent continued impressive growth for the company — as the company posted $28.6 billion in revenue and net profit of $7.3 billion, or $7.79 per share, in the same quarter last year. Apple sold 26 million iPhones and 17 million iPads in the quarter, roughly in line with analyst estimates, but underwhelming for a company that habitually blows away expectations. “It’s disappointing on the iPhone number,” Piper Jaffray analyst Gene Munster told CNBC shortly after the results were released.
Despite results that were lackluster by Apple standards, the company’s long-term prospects remain very strong, in part because there remains so much potential upside for iPad sales worldwide. “We’re thrilled with record sales of 17 million iPads in the June quarter,” Apple CEO Tim Cook said in a statement. “We’ve also just updated the entire MacBook line, will release Mountain Lion tomorrow and will be launching iOS 6 this fall. We are also really looking forward to the amazing new products we’ve got in the pipeline.”
Apple sold 26 million iPhones last quarter, down from 35.1 million in the previous quarter. On a conference call with Wall Street analysts, Cook was typically coy about forthcoming products but insisted that he’s not too worried about the fact that some buyers may be holding out for a hypothetical new iPhone, speculated to be called the iPhone 5S, which is rumored to appear this fall. While he acknowledged that iPhone sales were affected by “continuing speculation” about a new device, Cook said: “I’m glad that people want the next thing. I’m superhappy about that.”
As well he should be. More than many other companies, Apple’s results are dependent on the product cycle. Last quarter, there was no new major product introduction, other than a MacBook refresh. Given that Apple’s modus operandi of unveiling new devices in the fall is by now well known, it shouldn’t be surprising that some consumers are holding out for the new iPhone.
David Kudla of Mainstay Capital Management, which owns Apple shares, told CNBC that the earnings miss and resulting share slide could be a buying opportunity. “The miss is going to drive the stock price down, and we think this is really a buying opportunity,” said Kudla. “We still see a good second half for Apple,” he added.
Despite the lower-than-expected results, there were several positive notes in the report. On a conference call with Wall Street analysts, Apple CFO Peter Oppenheimer touted the increasing number of iPhones that are being used by corporate customers — further eroding Research in Motion’s traditional enterprise dominance with the BlackBerry. “We estimate that the number of iPhones in the Fortune 500 has doubled in the past year,” he said. The company also sold 17 million iPads, up 84% over the past year.
Although there has been some speculation that a slowing Chinese economy might dent Apple’s earnings, Cook said, “We did not see something that we would attribute to a weakening economy in China.” Instead, he explained lower Asia-Pacific revenue by citing “normal seasonality after a very successful iPhone 4S introduction.” He also added that Asia-Pacific revenue did not benefit from the new iPad in mainland China, which was only launched last Friday, after Apple resolved a trademark dispute over the product’s name. A stronger U.S. dollar relative to many foreign currencies was a also a factor, not just for Apple but also for all U.S. companies that do much of their business overseas, because a stronger dollar makes U.S. exports more expensive relative to foreign-made goods.
Bottom line: Apple’s recent performance has been so superlative that a missed earnings report is bound to set tongues wagging. But in this case, we can chalk up the company’s weaker-than-expected showing to consumers (finally) starting to understand the rhythm of Apple’s product cycle. Why would you buy a new iPhone when a brand-new model is expected in a few months? As long as Apple continues to introduce new products that wow consumers, Apple is going to be just fine. And as Mainstay’s Kudla noted, temporary weakness in the company’s stock price may just make for a rare buying opportunity.