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Apple’s Quarter Was Better Than Feared, But There’s Still Plenty To Worry About

Daily Ticker
Apple’s Quarter Was Better Than Feared, But There’s Still Plenty To Worry About

Apple's (AAPL) quarterly results were basically in line with expectations.

Traders had apparently been concerned that the quarter would be a disaster, because the stock jumped about 5% on the news.

But the news wasn't all good.

The highlight of the quarter was stronger-than-expected iPhone sales, which came in at about 31 million. The iPhone is Apple's biggest and most profitable product, so this is encouraging. One reason for the strong sales, however, was a drop in the average price of the iPhone, as Apple sold more cheaper and older phones as a percentage of the total.

Related: The Newest Risk for Apple Users & Shareholders

This pressure on iPhone prices will likely continue as competition intensifies, sales in developed markets slow, and competitors offer ever-lower priced phones that do most of what iPhones can do. And a reduction in prices, though healthy for Apple's overall market share, will eat into the company's profit margin.

The big concerns in the quarter, meanwhile, were Apple's overall sales, which were basically flat year over year, and a continued decline in Apple's profit margin. The latter led to a startling 20% drop in earnings.

A year ago, when Apple was flying high, if an analyst had predicted that Apple's sales growth would stop and its earnings would collapse, the analyst would have been laughed out of town.

That's what has happened, however. And it's the reason the stock is still down about 40% from its peak last September.

The reason Apple's sales growth has stalled is that the company has now gone almost 9 months without releasing a new product, the longest gap in recent memory. Analysts expect Apple to finally launch some new products this quarter--a new version of the iPad, for example, and possibly a cheaper iPhone--but these launches are not expected to include a major new product category. There is still talk that Apple will eventually release its own TV set, and there have been many reports that Apple will launch a "smartwatch" in 2014. But the company has gone ever longer without a big product release, and the excitement around these concepts has faded.

Two additional concerns in the quarter were weak iPad sales, which slumped 14% year over year, and sales in greater China, which collapsed. Apple did not offer much insight into why these once-powerful growth engines have stalled, but one answer is likely price. The most rapid growth in the smartphone and tablet markets is now coming in emerging markets like China, India, and Brazil. And Apple's current suite of products are simply too expensive for mainstream consumers in these markets.

The new products that Apple launches this fall should certainly help improve sentiment around the company and stock. Unless one of the new products heralds the arrival of a major new hit product category, however, this boost is likely to be temporary. Absent a big new product category, Apple is likely looking at several years of market maturation and price pressure, which should continue to act as a drag on both revenue and profit growth.

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