Verge reports on the financials of Apple.

Just stop. This is not your area of expertise, and you guys come of sounding like damn fools every time you try. Moreover, you do a great disservice to your readership and to the listeners of your podcast when you try to do an analysis of a stock's response to a quarterly financial report.

Here are just a few points, key one being: Stock prices move based on which way future earnings estimate revisions are going to go.

  • Did Apple beat all previous revenue records set by the company? Yes. But as far as the stock is concerned, it knew that already - it expected that already - AND IT WAS PRICED IN ALREADY! Apple doesn't get bonus points for meeting expectations.
  • Apple did 'guide down'. Nilay picked up a very important thread in the conference call, namely that Apple is changing the way it is giving guidance - no longer providing a 'conservative' estimate they are confident they can handily beat, but rather an accurate estimate of what they think their key metrics will be. They stated revenue would be between $41-$43 B in the quarter, operating expenses (employee salaries, rent, advertising, etc) would be 3.8-3.9 B in the quarter, tax rate of 26% and most importantly gross margin of 37.5-38.5% implying a net earnings of $8.5-$9.36 B (EPS of 9.04-9.97).
  • For comparison, last year, Apple had margins of 45% in the December quarter, and margins INCREASED to 47% in the following quarter (largely attributed to increased efficiency of having completed a product ramp). Therefore, Apple guided to a 10% drop in margins, and only a ~5-10% Y-o-Y increase in revenue. Last year Apple had 12.30 EPS.
  • More importantly, where were the analysts? Analysts with their price targets in the clouds, had sky high expectations of Apple. While investors were concerned with margin compression, slowing revenue growth, the analysts weren't there yet (as of the report). The conference call all but sealed the deal for investors - confirming their fears, while doing nothing to assuage them. Thus, the stock drops in anticipation of the barrage of negative analyst reports (relatively negative of course, this is Apple after all.)
  • Given the guidance, it is not a shocker at all - at least to the financial press - that the stock dropped; however, on the Verge you have yet another story about the insanity of the market.

But is it that insane? Let me give you a few statistics: Exxon-Mobil has net earnings of nearly $41 B last year and in all likelihood, will hit a very similar number this year. They have some $470B in revenue, sell a commodity product in a competitive market. They have a shareholder friendly capital allocation program whereby they give you a nice dividend which has been increasing year after year, and they buy back a monster amount of stock, giving you a larger share of future earnings (higher future EPS). Apple on the other hand, has $150B in revenue, and earns $41.7B in net earnings, sells a premium product for which they demand premium pricing -- and it isn't clear if they can demand that much of a premium (as measured by the margin) in the future. These two companies right now have the same market caps, and I think that's about fair - there's more risk and potential for more reward in Apple, but there is far less risk in Exxon and a fair amount less potential reward as well. Apple is one product innovation away from another home run - and one missed product cycle away from irrelevance.

All that said, I bought Apple shares on Friday - because I think it has been overdone. Apple does have $137B in cash that I would back out before looking at valuation. I think Apple is owning the tablet market and I don't think Google and Windows are making as much progress on this front -- Nexus 7 notwithstanding. And I think the iPhone is still an aspirational product for many -- and is selling well where the consumer can afford it -- just look at AT&T's and Verizon's reports!

My point in writing this isn't to recommend or not the shares of Apple, but to indicate to the authors of the Verge that a bit more education is required before they spout opinions on the 'craziness' of markets in light of record quarters that were entirely expected and priced in. While you guys focus on the last quarter's numbers - and I'm not saying its not important - Wall St is focusing on next quarter's and next year's numbers. That's where the discrepancy comes from: you see a record quarter that Wall St foresaw last quarter, and miss the fact that Apple all but told you earnings will be down 20% this quarter.