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Why Wall Street Grades Apple on Such a Harsh Curve

Motley Fool Staff, The Motley Fool

The tyranny of high expectations took another swipe at tech superstar Apple (NASDAQ: AAPL) late last week after it reported on its fiscal fourth quarter. Profits were way up, but because the actual number of iPhones sold was close to flat, investors sold off the stock. The Apple bears want to take this as a sign that the company is losing its luster. Management, meanwhile, has said it's going to stop reporting on unit sales at all. But is there really an issue for investors to worry about? What are the real takeaways from fiscal Q4?

In this segment from Motley Fool Money, host Chris Hill chats with senior analysts Ron Gross, Matt Argersinger, and Jason Moser about the outlook for the company, its headwinds, and its tailwinds.

A full transcript follows the video.

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This video was recorded on Nov. 2, 2018.

Chris Hill: Fourth quarter profits for Apple up 41% compared to a year ago. But, shares of Apple falling 6% on Friday after iPhone sales came in flat year over year. Jason, a lot of grousing among Wall Street analysts about this one.

Jason Moser: Let's everybody just take a step back. Let's keep things in context here. Bears will try to frame this quarter and the information we gleaned from the quarter into some earth-shattering move that shows that Apple's best days are behind it. That's just not the case. The big noise that's being made is that management is going to stop reporting unit sales for iPhones, iPads, Macs. When you want to steer your identity away from being primarily a phone company, this is a logical decision. "Hey, let's not worry about being so granular." And I think management's point on the call is actually right in that today, a unit of sale is less relevant for them than it was in the past. If you look at iPhones alone, there are a lot of different models now. You've got enough models to accommodate a very big market. It's not necessarily indicative of the health of the business because they're also selling iPads and Macs, but even more so the Services side of the business. And there is something to be said for the Wearables side of the business, as well.

They're witnessing some pricing pressures in emerging markets. Not terribly surprising. Average selling prices are not going to go to the moon. They also made the point that they released the most expensive line of phones here first, and the cheaper line of phones is going to be coming out this quarter. It was the opposite last year. That average selling price that was so high this quarter, reasonable to assume it'll probably be a little bit lower next quarter. But at the end of the day, these guys are selling millions and millions of iPhones. I don't think that's going to stop. If anything, maybe we see a little bit of time between replacements now, because phones are better and we're getting more time out of the phones that we buy. But they've still got quite the loyal customer base. I think things are going to be OK.

Ron Gross: I think there were probably a lot of disappointed analysts out there who will no longer get quarterly unit data. We're all paid to opine on a quarterly basis about the health of Apple and all the other companies we follow. But for shareholders, I don't really think it matters. I'd love to see that data released on an annual basis, so we can calm down on a quarterly basis, and just look at things annually. But I'm not actually sure they're even going to do that. I would encourage them to give us data on a yearly basis.

Moser: I will say, on the flip side of this, because they are focusing the business more on the Services aspect, they are going to give us a little bit more information in regard to that. We're not only going to get the revenue that the Services segment generates, but also the costs involved with that revenue. We'll be able to see how profitable that is and start looking ahead to see how profitable it can one day become.

Matt Argersinger: Can we also just mention that Apple has more cash on its balance sheet than the size of all but 10 companies on the planet? It's a remarkable number. I know we talk about it every quarter, and it's not surprising, but it's still just remarkable to me.

Moser: The bottom line with this, and what I think investors want to know -- what do I do? Is this a problem? Is this a crisis? Do I need to sell my Apple shares? Absolutely not. This is just as good a business today as it was yesterday before they announced these results. If you're a shareholder in Apple, you need to hang on to those shares, knowing that you're an owner of one of the most important companies in the world.

Chris Hill has no position in any of the stocks mentioned. Jason Moser owns shares of Apple. Matthew Argersinger has no position in any of the stocks mentioned. Ron Gross owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.