Article / 24 January 2013 at 15:39 GMT

Above the Noise: Insane market reaction to Q1 Apple earnings

Head of Equity Strategy / Saxo Bank

When the world's largest publicly traded company falls 10 percent in after hours trading it catches the attention of anyone that works with equities. Obviously, I do not follow Apple (AAPL:Nasdaq) as a sell-side analyst so any conclusions I make about its earnings release in this post will not involve details about iPhone sales figures etc., but rather provide a helicopter view. My main conclusion is that the 11 percent decline in the early US session is a huge overreaction not based on fact but an excuse for portfolio managers to sell positions "deep in the money". However, I believe this sell-off represents a huge opportunity to be long as I believe Apple still has more potential in terms of products etc.

Market disappointment number 1: Revenue was weak
Year-over-year revenue growth was slightly less than 30 percent (see chart below). Given the sate of the global economy's below trend growth I estimate then that Apple's revenue growth was pretty good. Is revenue growth falling? Of course, and we would expect it to fall. When annual revenue is fast approaching USD 200 billion revenue growth cannot continue to increase more then 20 percent YoY for long.

Apple revenue growth 2005-2012

On a conference call, Apple's CEO Tim Cook said that "We can't keep up with demand" citing that the company's switch to new design models has constrained the business a bit in terms of supply chain. The balance between demand and supply should reach equilibrium in this quarter.

One final point on revenue growth. China saw 67 percent growth YoY and 61 percent of revenue comes from international markets so growth in revenue is not under threat any time soon.

Market disappointment number 2: iPhone sales
Apple sold 47.8 million iPhones versus 47.8 million expected so the volume figures were in line with expectations and had it not been for supply chain constraints then Apple would have most likely beaten expectations. The company sold 22.9 million iPads compared to 22.4 million expected, so again no disappointment here.

Overall the iPhone sales figure was the trigger point for traders in the after hours sell-off. However if supply/demand can balance in this quarter and China continues to demand iPhones this quarter's revenue and iPhone sales should continue to grow.

Concern number 1: Is innovation dying at Apple?
Well here are two things on this issue. Firstly, Tim Cook reiterated on the call that Apple still has an exciting pipeline. Secondly, let us stop believing that Steve Jobs was the mastermind of innovation. There are thousands of extremely intelligent engineers working at Apple every day and they are the true innovators. Thirdly, Jonathan Ive is just as 'smart' a guy when it comes to industrial design as Steve Jobs was and Ive was recently promoted to the overall head of software and hardware designs for devices. In my opinion innovation is not dying at Apple but it takes years to come up with new disruptive ideas. Thinking about the time span between the iPod and the iPhone gives you an idea of how many years. 

The market is pricing Apple for profit decline - a mistake in our view
In this one year-old article we looked at various indicators' relationships to AAPL earnings yield and based on Apple's P/E ratio of 10.3 (TTM) and 9.7 (12-month forward) the market is discounting zero or even negative growth which in our mind is an extremely bearish view with no real substance to it.

The facts still point towards growth and Apple's eco-system is still far better at extracting profits from its various product categories compared to its competitors. With continued growth and potentially a more aggressive buyback programme this level might be an excellent opportunity for investors that want to be long-term investors in Apple (more than six months).

Kristiann Kristiann
No doubt an insane reaction to earnings. I'm not seeing Apple moving up anytime soon, either technical or fundamental.
Lubomir Lubomir
Peter, thank you for the helicopter view, Myself, I could find some interesting and encouraging ideas out of that
Lubomir Lubomir
Kristian, this corresponds a bit to your point, when it comes to technical


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