The lack of consensus over what the market wants to do has resulted in a trading range for the past ...
A Great Quarter for the iPhone but a Worrying Quarter for Apple
04/28/2015 9:08 am EST
Overall, it was a great fiscal second quarter for this leading technology company, based on one product in particular, but MoneyShow’s Jim Jubak points out that the problem now is that puts all the pressure for growth on said product.
A great quarter for Apple’s iPhone.
A worrying quarter for Apple (AAPL) as the company becomes even more dependent on the strength of one product line up.
For the quarter, the company’s fiscal second quarter, announced Monday, Apple beat on earnings—$2.33 a share vs. the $2.16 consensus on Wall Street—and revenue—$58.01 billion vs. the $56.1 billon consensus. Gross margins of 40.8% were above guidance of 38.5%-39.5% and the consensus estimate of 39.5%. For the upcoming third quarter, the company guided in line with Wall Street expectations. My guess is that’s the usual Apple positioning, the bar low enough to jump.
In short, a great quarter.
But here’s my worry. For the quarter, sales of iPads came to 12.6 million vs. 16.4 million last year and Wall Street estimates of 14 million. For the period, Apple sold 4.6 million Mac computers against 4.1 million in the second quarter of fiscal 2014 and Wall Street estimates of 4.6 million.
There’s nothing terribly wrong with those numbers. 12% growth for Mac computers in the current environment for PC sales is actually very impressive. And everybody was expecting a continued decline in iPad sales as tablets continue to see more competition and flagging demand. Although with iPad sales down year over year in seven of the last eight quarters, Apple clearly has an iPad issue.
The problem is that the slow or no growth in iPads and Macs puts all the pressure for growth at Apple on the iPhone. In this quarter, Apple’s smart phones delivered with sales of 61.2 million units vs. 43.7 in the second quarter of fiscal 2014 and against the Wall Street consensus of 57 million units.
But we know that iPhone sales run in cycles that depend—in good part—on how recently Apple released a new and compelling upgrade and the cycle of upgrades at competitors such as Samsung. In the calendar fourth quarter of 2014, for example, the iPhone 6, with its larger screen, clawed back share from Samsung and the two companies finished the period in a near dead heat with 19.6% of the global smartphone market after each company shipped 74.5 million phones. But go back a year when Samsung’s bigger screen phones were competing with the Apple 5 and 5S. In the fourth quarter of 2013, Samsung shipped 86 million phones to Apple’s 51 million.
It’s actually amazing to me that Apple matched Samsung’s unit sales in the fourth quarter of 2014. Apple sells its phones only in the top part of the smartphone market while Samsung competes at the top with Apple and at lower price points with China’s Lenovo and Huawei and others. So, in most quarters, Apple won’t match Samsung on unit sales because it doesn’t offer products in a good chunk of the global smartphone market. (That strategy also means that Apple kills Samsung on margins.)
The fourth quarter results were partly the result of timing. Apple’s new models launched in the quarter and were going up against older Samsung products since the Korean company wasn’t due for a new product launch in its Galaxy line, the S6, until the calendar first quarter of 2015.
They were also a result of a relatively cool reception for the Galaxy S5. That phone sold about 40% fewer units in the three months after its launch than its predecessor the S4 did in its first three months on sale. The phone just didn’t have enough compelling new features to drive people to buy or upgrade.
Apple also got a huge boost with the beginning of wider distribution in China as it began selling phones with China Mobile. China sales climbed 72% year over year. Duplicate that.
So, growth in China aside, the biggest challenge for Apple next quarter—and the quarter after—will be holding onto market share against the new Samsung product. The Galaxy 6 Edge looks like a success with Samsung ramping up a third factory sooner than expected, but numbers for the Galaxy 6 without the edge design could indicate that this model might follow the disappointing sales path of the S5.
The point is that with a bigger share of Apple’s revenue depending on the iPhone, questions like these about Samsung’s newest product become more important. And that means that the risk and potential volatility in Apple’s stock are higher.
A new product with lots of sales that took some of the burden for Apple’s success off the iPhone would reduce that risk. Unfortunately, so far, thanks to Apple’s decision to restrict production of the Apple Watch to give the product a feel of exclusivity, we don’t know what demand for the watch will be. We do know that, so far, it carries a slightly smaller profit margin than the iPhone. And we certainly don’t know how successful the next big Apple product will be since we don’t even know what it will be.
I don’t think this worry is enough to say sell Apple shares. (I did sell Apple out of my Jubak’s Picks portfolio after last quarter’s earnings but that was on the basis of seasonal patterns in technology share prices and sales.)
It does say, though, that maybe the thing to track for Apple shareholders right now isn’t the Apple Watch but the sales figures from Samsung.
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