It's not easy running a consumer electronics legend, as Apple (AAPL) CEO Tim Cook is no doubt realizing Tuesday. On Monday, the company announced earnings that moderately beat analyst expectations. Revenue hit a new quarterly record, as did the volume of iPad and iPhone sales. Plus, the iPhone's average sales price (ASP), a major driver of revenue and profit potential, strongly rebounded from a year of decline.
And yet, the stock dropped precipitously in after hours trading afer the announcement and by midday Tuesday the share price had fallen by $42 to $508 a share -- an 8 percent drop.
Why are Apple investors so hard to please? The answer is found in a twist of an old saying. Instead of "What have you done for me lately?" Wall Street is bothered by what Apple will -- or won't -- do for them tomorrow.
The clue to the rampant investor dissatisfaction was in Apple's guidance for the current quarter that ends in March. Would it be as big as the one that just closed? Not a chance, Apple said. The holiday sales period is Apple's strongest, and a relative seasonal slowdown is expected. But it's the coming quarter in context that bothers them.
Under the leadership of Steve Jobs, Apple used to strongly blow through Wall Street expectations quarter after quarter. Back then, either management was incapable of actually forecasting or, more likely, the company grossly underplayed its projections to analysts. Those practices have ended, so when investors see guidance for a future quarter, it becomes what they expect to happen. In this case, the guidance doesn't suggest the type of sales and earnings growth they want.
Apple's guidance for the current quarter is between $42 billion and $44 billion in revenue. That compares to $43.6 billion in revenue for the same time last year. Gone is the 6 percent growth seen last quarter, and that is with the supposedly improving relationship with China Mobile, that country's largest wireless carrier. If significant growth can't come from China, then Apple has become dependent on the conditions of a maturing market.
Perhaps Apple will suddenly announce a major new type of product that will do what the iPad, iPhone, and iPod previously did. But there is no telling when, or if, that might happen.
More troubling is that Apple expects gross margins of between 37 percent and 38 percent -- high for the industry, but down from the 47.4 percent it saw in the first calendar quarter of 2012. That slump continues, even as iPhone ASPs have recovered much of their luster. Have they begun to cost significantly more to make, or is the company facing plummeting margins elsewhere that might drag down performance?
And then there are expenses. The projected operating expenses for the quarter are between $4.3 billion and $4.4 billion compared to the $3.8 billion of last year.Flat revenue and margins coupled with rising expenses likely mean falling profits. And that's enough to make plenty of investors head for the exits.