What the Hell is Wrong With Apple?

Apple stock

Source: Yahoo Finance

That’s the question you may be asking yourself if you pay attention to the constant market chatter surrounding the world’s most valuable company.

Apple can apparently do no right these days. The tech giant merely rakes in tens of billions of dollars each quarter, sells just millions of iPhones like clockwork, and only has enough cash to buy a few small countries. Apple, showcasing a $775 billion market capitalization earlier this year, is now down to its last $630 billion. If things don’t turn around soon, Apple can forget about becoming the first company to cross the $1 trillion mark — a clear sign of failure.

But seriously, what the hell is wrong with Apple?

The latest earnings release did little to answer that question. For the three months that ended September 26, 2015, Apple earned $11.1 billion ($1.96 per diluted share) on revenue of $51.5 billion. It was a beat on the top and bottom line, and the best fiscal fourth quarter in company history for the iPhone. Mac sales and revenue from services also hit all-time records. In fact, the entire fiscal year was one for the record books.

“Fiscal 2015 was Apple’s most successful year ever, with revenue growing 28% to nearly $234 billion. This continued success is the result of our commitment to making the best, most innovative products on earth, and it’s a testament to the tremendous execution by our teams,” said Tim Cook, Apple’s CEO, in a press release. “We are heading into the holidays with our strongest product lineup yet, including iPhone 6s and iPhone 6s Plus, Apple Watch with an expanded lineup of cases and bands, the new iPad Pro, and the all-new Apple TV which begins shipping this week.”

Wall Street yawned. Apple initially traded 2% higher after the results but then the market quickly took it back. Unlike other tech giants, Apple’s profits are routinely taken for granted. Amazon recently reported a measly surprise profit of $79 million, which added $30 billion to its market cap in under one hour. Microsoft shares jumped by double-digits in the minutes after its earnings release, despite missing on earnings and revenue. It’s a bizarro world.

Wall Street started losing its taste for Apple after July’s earnings announcement, when Apple beat on the top and bottom lines but slightly disappointed on iPhones. The next day, Apple shares fell below their 50-day moving average and haven’t been able to fully recover since. It was Apple’s worst one-day percentage decline in over a year. More recently, China slowdown concerns and the usual innovation rhetoric have kept Mr. Market feeling quite glum about Apple. Though, these fears appear to be overblown judging by the latest numbers.

Apple grew its revenue in fiscal 2015 by $51 billion compared to the prior year. As Cook notes on the conference call, Apple’s growth is more than full year revenue at almost 90% of the companies in the Fortune 500. China’s contribution is more sweet than sour.  In the September quarter, revenue in Greater China nearly doubled year-over-year to $12.5 billion. If it wasn’t for the never-ending media coverage on China, you might think all is well.

“ … [F]rankly, if I were to shut off my web and shut off the TV and just look how many customers are coming in our stores regardless to whether they’re buying, how many people are coming online, and in addition looking at our sales trend, I wouldn’t know if there was any economic issue at all in China,” explained Cook, on the conference call.

Apple had the chance to impress Wall Street with new products at its Sept. 9 Keynote Event, but once again, Wall Street was left wanting more. Apple unveiled new Apple Watch options, the iPad Pro and iPad mini 4, a revamped Apple TV, and the iPhone 6s along with the iPhone 6s Plus. The Apple TV was the most exciting device of the lineup, while everyone couldn’t help but snicker at the Apple Pencil, a glorified stylus for the iPad Pro. Steve Jobs himself once ridiculed the stylus of his time and questioned who would want one.

Cue the innovation-is-dead memes.

Never mind the fact that the world has changed since Jobs’ reign. Technology is more accepting of a stylus-like instrument, and the Apple Pencil is clearly not meant for the casual user trying to check email. It’s a tool designed for the business world — a segment Apple is targeting via recent partnerships with IBM, Cisco, and Microsoft.

Jobs also said no one would want to buy big-screen phones, at a time when iPhones only offered a 3.5-inch screen. The latest iPhones, which come with 4.7-inch or 5.5-inch screens, continue to break sales records — 13 million sold in their weekend debut. Over the past 12 months, Apple sold 231 million iPhones around the world.

Apple shares now find themselves about 15% off from recent highs and barely in positive territory for the year. The earnings report reveals nothing is fundamentally wrong with Apple. Yes, it relies heavily on the iPhone, but consumers still crave the device and Apple will continue to develop new products. In the meantime, investors can take solace that Apple has returned $143 billion to shareholders through share repurchases and dividends, with at least another $57 billion on the way via its capital return program. Patience isn’t just a virtue, it’s a necessity.

Who knows if the holiday numbers will be more than enough to please Wall Street. But one thing is certain. Apple will rake in billions of dollars, sell millions of iPhones, and hold enough cash to determine its own future.


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