Apple (NASDAQ:AAPL) stock fell off the cliff on Monday, shedding about 8 percent of its value overnight after the technology company reported results for its fiscal first quarter, which ended in December. Shares closed Monday’s regular trading session at $550.50 apiece and opened on Tuesday at $508.89, falling as low as $502.08 before recovering slightly, as investors balked at what was an ostensibly weak quarter.
Here are the numbers: Quarterly revenue increased 5.6 percent on the year to a record $57.6 billion the the company’s fiscal first quarter, beating the mean analyst estimate of $57.5 billion. Earnings increased 5 percent to $14.50 per diluted share, also beating the mean analyst estimate of $14.09 per share. Net profit was flat at $13.1 billion, while Apple’s gross margin narrowed to 37.9 percent from 38.6 percent. International sales accounted for 63 percent of total sales, up from 61 percent in the year-ago period.
The “biggest issues with AAPL’s Dec-13 report,” wrote analysts at Piper Jaffray in a research note published Monday evening, were not the actual revenue or earnings results, but that “iPhone units missed Street estimates by 7% and the company implies iPhones may be close to flat y/y in March.” Sales estimates missed expectations “despite the addition of China Mobile (NYSE:CHL) (as well as DOCOMO and T-Mobile with no y/y comps).” Apple sold 51 million iPhones in the quarter, an all-time quarterly sales record that fell short of expectations for 55 million sales. Actual iPhone unit sales grew 7 percent on the year compared with expectations for double-digit growth.
Piper Jaffray analysts suggest that the discrepancy can be explained by the increasing saturation of the U.S. smartphone market and a slowdown of its growth. The market “is close to operating on upgrades as the bulk of product sales, which may imply flattish growth going forward from the US,” wrote the analysts. “We believe this may imply iPhone growth rates slower in CY14/CY15 than we previously expected and have adjusted our iPhone unit expectations for those two years by ~7%.”
In a research note published Tuesday, analysts at Cantor Fitzgerald summarized the situation this way: “Last night, Apple reported a strong EPS beat and upside in iPad unit sales but disappointing iPhone trends and a soft 2Q:FY14 outlook. In our view, it was more clear than ever that Apple needs to introduce a new product category to return to healthier growth trends.”
What does the iPhone trend look like right now? The short answer is that it is good. In Apple’s fiscal fourth quarter, iPhone revenue grew 17 percent on the year and accounted for 52 percent of total revenue — in its fiscal first quarter, iPhone revenue grew 6 percent and accounted for 56 percent of total revenue. The iPhone is still clearly Apple’s flagship device, but its position as a driver of growth may be waning relative to its other products.
IPad unit sales increased 14 percent on the year in the first quarter, while revenue from the device increased 7 percent. Mac unit sales increased 19 percent; revenue increased 16 percent. ITunes, software, and services revenue increased 19 percent on the year, once again claiming the highest growth among any Apple segment for the quarter. Only iPods saw a contraction in unit sales and revenue.
“As we have previously discussed, we expect Apple to unveil the much anticipated ‘iWatch,’ ‘iPad Pro,’ and larger-sized iPhones before the end of CY:14, providing Apple with entry into a new product category and also expanding the breadth of the company’s existing product offerings,” wrote analysts at Cantor Fitzgerald. “In our view, the high-end smartphone market hit a wall over the past year and Apple has struggled to grasp the scope of the situation; however, a new product category, expanded product breadth, and executing on the China Mobile agreement has the potential to offset some of this weakness.”