Apple takes wild ride after earnings report as Wall Street shoots first and listens later

10/28/2013 6:55 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

What a wild ride for Apple (AAPL) shares in after-hours trading after the company announced earnings today after the market closed.

Shares spiked to $542 initially in after-hours trading on news that Apple had come in ahead of Wall Street estimates for earnings of $7.94 a share by 32 cents a share. (The shares closed the regular trading session at $529.88.) Revenue climbed to $37.47 billion, slightly ahead of the analyst consensus of $36.87 billion.

Then shares plunged as traders and analysts fastened on what seemed to be a serious miss in guidance from the company for the December quarter. For the December quarter Apple told Wall Street to expect revenue of $55 billion to 58 billion—the analyst consensus was $55.73 billion—and gross margins of 36.5%-37.5% versus the Wall Street projection of 38%. On that the stock dropped almost $40 a share to $503.

And then, still in after hours trading, the stock rallied back to $529.93 a share when, in the company’s conference call, chief financial officer Peter Oppenheimer explained that the lower gross margin and the possibly disappointing revenue number were the result of the company deferring $900 million in revenue from the December quarter to future quarters. As the company gets more of its revenue from software—iTunes showed $4.4 billion in billings in the quarter, for example—Apple will, as is typical for software companies such as Microsoft (MSFT), defer more revenue in order to match up the timing of revenue recognition to the date when revenue for software is “earned.” That deferral, plus higher cost structures for the MacBook Pro and iMac, resulted in guidance for lower gross margins. However, if you factor out the effects of deferring revenue from software, which is a high margin product, gross margins in December will be in line with September quarter margins.

I think Wall Street reacted so strongly to a “disappointment” that turned out to be (mostly) an accounting issue because Wall Street was looking for Apple to disappoint. The market had been awash in rumors before the earnings report of production shortfalls that would limit sales of the iPhone 5S in the December quarter. It was looking for margins to fall on higher costs in new products—so that what looked like falling margins fit the story.

The quarter didn’t put all the questions about Apple to rest. Yes, iPhone sales picked up to 33.8 million units (ahead of the analyst estimate of 32 million) but Apple still has to score an amazing fourth quarter for iPhones and the new iPads to meet expectations. Investors still expect the company to introduce a new blockbuster product—and soon. The company has been losing market share to Android phones and tablets in general and Samsung in particular; investors want to see Apple claw back some of that share with its new product updates.

The quarter reported today was a good quarter. But it’s still the December quarter that will make or break Apple’s share performance for the year.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did own shares of Apple as of the end of June. For a full list of the stocks in the fund as of the end of June see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/. For more of Jim’s posts and picks check out his free site at http://jubakpicks.com/ or his subscription site at http://jubakam.com/

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