What to Make of Apple’s Earnings

From the archives of TheStreet.com, here’s the beginning of Troy Wolverton’s story on Apple’s (AAPL) earnings report from six months ago:

Apple sweet earnings report left a bad taste in the mouths of some analysts and investors, sending the company’s shares lower on Thursday.
Apple’s shares were recently off $3.39, or 8.3%, to $37.65.
On Wednesday afternoon, the computer and electronics maker topped Wall Street’s earnings estimates by 10 cents a share and offered better-than-expected guidance for its current quarter.
Despite the blowout numbers, some analysts still found room to quibble.

And this is Wolverton’s story from today:

While the company topped bottom-line expectations, its sales fell short of Wall Street’s estimates. More importantly, iPod sales were nowhere near the heady numbers bandied about on Wall Street.
And following the company’s earnings announcement, its stock dropped like a rock. In recent after-hours trading, it was off $5.44, or 10.5%, to $46.15 on Instinet.

Reads a bit similar, don’t it? One stock, two earnings reports and the same results. Well, if a stock rallies from the upper-$30’s to the mid-$50’s in the last three months, you can be sure that it’ll be pretty hard to deliver on expectations. That’s why the smart money knew this and starting dumping Apple last week. Except for today, the stock dropped for five straight sessions. To me, the only surprise is that some people were still surprised.
Let’s make one thing perfectly clear: Wall Street is not upset that Apple missed its revenue target. Please. Wall Street couldn’t care less about sales figures unless it’s looking for other excuses. Apple missed its sales forecast by roughly one day’s worth of sales. That’s nothing. What upset the Street is the earnings miss. By miss, I mean that Apple only beat by one penny a share.
After beating by six cents last quarter, and ten cents in the previous two quarters, Wall Street was expecting a massive earnings surprise. (Bear in mind Wolverton’s story above is about a sell-off following a 10-cent surprise). For this quarter, the Street high was 43 cents a share. That’s what Wall Street wanted and it didn’t get it. By any reasonable valuation, Apple is at least 20% overpriced. Should Apple really be going for twice the earnings multiple of Dell (DELL)? I doubt it and the only reason investors paid for it was they wanted a positive news cycle. That’s why you now hear talk of Apple’s revenues shortfall.
My advice is to stay away for now. The good news is that the company gave a positive forecast for this quarter. If the shares pull back enough, we might have a good buying opportunity, but not now.
Addendum: I’m guessing tomorrow’s secret announcement won’t be a video iPod, but expanded storage.

Posted by on October 11th, 2005 at 11:17 pm


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