Apple Misses Expectations

02/03/2014 12:01 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

The stock market punished this tech company, despite it selling 51 million iPhones, and MoneyShow's Jim Jubak explains why the market's reaction is important to investors.

On January 27, Apple (AAPL) came out and announced earnings and Wall Street went, “Bla, bla, bla,” and it's really interesting because I think that there are two things going on here and one is, and that's the really more important one because it has more to do with the market as a whole, than just Apple, is Apple announced that it had sold more iPhones than ever. This is the record quarter that they sold 51 million units of iPhones. The problem, of course, is that Wall Street was somehow projecting 55 million units, so for the quarter, this is a big disappointment and that, I think, is what's really important. That what's driving a market here that's trading at historic highs are expectations and to get the market to move up from here, you've got to have earnings, or sales, or prospects, or projections, or something that really is above expectations. You can say, well, “Apple went up about 25% in the last six months of the year before this earnings retreat,” and you can say, and I think you should say, “Okay, so this projection of 55 million was really priced in.” If all they'd done was match that, would the stock have gone up? and I think the answer is, “Well, probably not very much.” The question for Apple, and for a lot of other companies, whether it's them, or McDonalds, or in any other field that you're looking at, is how you beat where you are. The expectations are so high, we've bid up our stocks so high that trying to come up with a way to do that, a way to beat, a way to move stocks up further is really, really hard.

Most of the companies that are announcing this quarter are not producing those kinds of things. They're producing a small beat, or, as Apple did, a beat and then disappoint on earnings, but disappointing revenue or guidance, that's kind of mediocre going forward, which also Apple did, that's not exactly what you want to see if you're looking at a general global picture where the fed is reducing the amount of money in the marketplace available to buy financial assets, and you're trading at all-time highs.

You've got to have something to drive it higher and, right now, what we're getting is a kind of realization in the market that that's not happening this quarter and so we're seeing a sell-off. That's what we want to see. We're not even near correction territory. We're down like 4%. Correction is 10%. This is very, very modest. It only seems so extreme because we haven't really had anything, like, even a 4% decline in all of 2013, so this seems bigger than it is. In other years, it wouldn't be striking and it's the kind of reset that you really need before you can move higher. The question is, how long the reset lasts, and what does it take to move us higher from here, and on using Apple as an example, the real question is how you get expectations to come back down, so that you've got some chance of beating them going forward.

This is Jim Jubak for the MoneyShow.com Video Network.

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