At the time of writing, Apple (AAPL) has fallen by 8% on a revenue and earnings beat. The headline numbers are good enough: EPS of $14.50 was about 3% above expectations and 6% year-over-year revenue growth to $57.69 billion was another healthy beat.
While the numbers may sound impressive on the surface, sophisticated investors know to look deeper. Apple is one of the most closely scrutinized stocks in human history, and analysts scrutinize its constituent parts to find indicators of AAPL’s future growth prospects. And this was a concern. Although AAPL is maintaining its dominance in the smartphone market, iPhone sales were lower than expectations. iPad and Mac sales beat expectations, but Wall Street doesn’t care about PCs (which are on the decline) or iPads (which yield little margins and lack the growth potential of smartphones).
All eyes are focused on the iPhone business, and this miss has been interpreted in a variety of ways. For some, it’s a sign that AAPL has peaked in innovation. For others, it’s a sign of maturity in the smartphone market. For others still, it’s a sign that the various iPhone models released are cannibalizing each other, limiting the company’s ability to maximize market share.
There is also concern that AAPL is not penetrating emerging markets, with China the main focus. China’s macroeconomic environment has turned relatively lackluster, but Apple’s recent deal with China Mobile was considered a key opportunity for revenue growth in the future. However, Apple’s revenue guidance fell short of expectations, which Apple CFO Peter Oppenheimer says is the result of a shift of inventory towards new sales channels. In other words, Apple is more dependent on China, which is much more uncertain.
There are many things to learn from this earnings call, but three stick out most significantly.
1. Earnings calls are a game of expectations and guidance.
What happened in this case, as in the case of many earnings calls, is investors respond not only to past revenue and earnings but the company’s expectations for future revenue and how those expectations compare to Wall Street’s expectations. This is why forward guidance is so important—it tells investors whether management is expecting more or less from the company than investors are. If they expect less, the stock will almost always fall. If they expect more, it will go up.
2. Headlines mean little more often than they mean a lot.
We saw revenue and earnings beats here, but the stock fell. This happens a lot, and again proves that you cannot invest in a company based on a headline-level knowledge of the company. If you do, you will lose out to savvier investors who look deeper at the components of the company that truly matter.
3. This quarter’s response prepares for the next.
Now that the stock is down around 8%, all information about last quarter and next quarter’s guidance is priced into the stock. Investors now need to ask themselves if the stock has fallen enough to make it cheap enough to buy, or if it will go down further before next quarter. Investors also need to consider whether the low guidance will cause a pop next quarter; again, the forward guidance is factored into the stock price now, so will Apple be able to outperform and cause the stock to jump 8% next quarter? It’s usually easier to go up one quarter if you’ve gone down the previous quarter, so now might be a time to buy, especially if sellers panic and drop the price too low.