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Apple Inc. (NASDAQ:AAPL) Earnings: The Good, Bad, And Not-So-Ugly

Apple stock

I’m going to start a new quarterly ritual for LearnBonds readers by once again taking a look at Apple Inc. ‘s quarterly earnings, providing a realistic take on the past three month’s performance, and thoughts on the iPhone maker’s forward outlook.

First, I’ll point out that Apple’s stock, which traded at about the $95 range following last quarter’s release, has skyrocketed over the past three months, eclipsing the $118 mark at one point — providing better than 20% return and $100 billion growth in equity market cap.

Apple Inc. (NASDAQ:AAPL)

What Has Happened at Apple Inc?

Before looking at Apple’s fiscal 2016 Q4 numbers, we’ll note that the Apple iPhone 7 was launched in early September, with somewhat less than usual fanfare. Apple’s stock actually dropped a bit following the announcement and look-see. However, it quickly snapped back and has been trending higher ever since. 

And even at $118 a share, the stock trades with a market discount earnings multiple of about 13X. Despite its success over the past decade, however, investors continue to be split on the long-term prospects for the company’s revenue and bottom-line. Still, short interest sits at around 1%, as critics don’t seem inclined to put their money where their mouth is.

The basis for much of the most recent price surge, however, seems to be at the cost of its chief rival in the smartphone business, Samsung. Overheating issues have been plaguing the Galaxy Note 7 for  several months now. Market sentiment has Galaxy users gravitating over to the iPhone 7, at least for the time being.

If Apple Inc. is able to even capture a fraction of Samsung’s business due to Galaxy problems, it could provide for a huge FY 2017 and perhaps beyond.

On With The Show

Apple Inc. ‘s latest quarter was a sequential replay in many ways. Same quarter YOY decline in revenue and earnings were 9 and 10 percent, respectively. The only Apple division to show meaningful increase was its services division, while iPhone unit and cash sales were down 5% and 13%, also respectively, compared to 2015’s Q4. The decline in Mac business was marginally worse, while iPad revenue was flat, despite a 6% drop in unit movement.

Given the fact that business does not appear to be worsening, investors have been giving the company the benefit of the doubt. Although I will note that Apple’s stock took a bit of a hit, about 4%, in early Wednesday trading. Keeping some perspective, that represents less than a quarter retracement of the stock’s move over the past three months.

Apple Inc. – Looking forward

As is generally the case with earnings’ reports, however, analysts and investors are typically more concerned with the forward outlook as opposed to what happened in the rearview mirror.

The most important piece of Apple’s guidance is for revenue to come in somewhere between $76 billion and $78 billion for its fiscal 2017 first quarter. Last year’s comparative number is $75.9 billion. So Apple is implying that YOY sales will come in somewhere between flat and up 2.75 percent during the holiday shopping season.

Given the fact the last two quarters have shown almost double-digit revenue decline, this is somewhat significant. Still, investors may have already been pricing in something better, given the inference from early trading reaction.

The analyst community sees upper-single-digit earnings growth from the company over the next 12 months. While I would have considered that somewhat aggressive three months ago, Samsung’s woes are bringing a renewed sense of optimism to the feet of Apple investors. If the Galaxy debacle is not corrected or stalls innovative drive, it’s possible that there may be some upside to Apple’s forward numbers.

Still, just like the PC, there will come a time that smartphone innovation stalls, and consumers won’t be in a rush to upgrade their units. Given Apple’s results over the past 12 months, it’s easy to argue that that might already be happening.

At 60% of trailing quarter revenue, the iPhone leaves Apple highly vulnerable to a change in consumer habit. Still, with China and the rest of the emerging Pacific rim accounting for less than 25% of operating revenue at the moment, there’s room for further global penetration of Apple products.

Also, one must also believe that the company is planning other disruptive technologies/products that at any time might take the world by storm. Apple isn’t alone, however, and while it is a cash cow at the moment, investors shouldn’t rest by their laurels and assume this is some sort of smooth sailing long-term investment. Arguably, it will be difficult to consistently grow the company with its massive market capitalization now at better than $600 billion.

Risk, especially in the tech space, is real. While Apple’s current position might lead one to think otherwise, history is littered with technology companies that were on top of the world but managed to go from first to variably worst over incredibly short periods of time.

Adam Aloisi was long shares of Apple at time of writing, but positions can change at any time.

This article is not intended as individual or reader-specific investment advice. Do your own research and consult a financial professional, if necessary, before investing in anything.

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    Adam Aloisi has over two decades of experience investing in equities, bonds, and real estate. He has worked as an analyst/journalist with SageOnline Inc., Multex.com, and Reuters and has been a contributor to SeekingAlpha for better than two years. He resides in Pennsylvania with his wife and two children. In his free time you may find him discussing politics, playing golf, browsing antique shops, or traveling.

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