Breakout

Apple Earnings Need to Come in BIG

Jeff Macke
Breakout

Apple (AAPL) devotees are generally quick to blame some combination of Wall Street and the press for the 30% decline in AAPL shares since September. The grim reality is that Apple burned the Street long before analysts started the downgrade parade and the press just reported the story.

After not missing estimates a single time for more than five years, Apple, under current CEO Tim Cook, has missed analyst estimates 3 out of 5 quarters. Since the most recent miss last October, shares have lost more than 25%. If Apple wants to get its groove back the first step is going to be coming in somewhere north of $14.20 EPS on about $56 billion in revenues.

But hitting estimates is less than half the story for Apple at this point. Far more concerning is the company's uninspired business model. Last year at this time rumors were everywhere that Apple was on the verge of "solving" television. According to Jeff Kilburg, founder & CEO at KKM Financial, rumors out of China this year involve seven or eight new products including low-end smartphones, a larger screen for the iPhone and, yes, Apple television.

"A lot of folks have actually talked about how they're not innovating anywhere," Kilburg asserts in the attached video. "Seven products in 2013; it's going to be a big year for Apple."

Two problems. First, none of the rumored products would actually be new. Making the same basic product in different sizes and colors isn't new. If you gain 15 lbs and get a tan on vacation that doesn't make you a new person, just a fatter version of the old one. Making an iPhone the size of a Galaxy III is desperation, not innovation.

The second issue facing Apple and its stock is mining existing products to maximize profits is smart and practical, but not growth. I've written recently that Apple is being run by MBA's and product managers as opposed to innovators. That's not a philosophical observation, but an investing concern. Innovative companies trade at huge or even incalculable multiples. No one cares what Amazon (AMZN) earns because they trust Jeff Bezos' ability to allocate cash. Everyone cares about Microsoft's (MSFT) quarterly results because the company hasn't done anything exciting in more than a decade.

Apple can report anything it wants tomorrow provided there's a timetable for a release involving something other than a phone or a tablet. The market doesn't give lifetime achievement awards; Apple isn't going to move higher just because it used to be great.

Do you agree with Kilburg that it'll be a big year for Apple? Let us know in the comment section below or visit us on Facebook.

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