If you are an Apple shareholder, learn to stomach the volatility. It’s not going away.

Last night Apple reported Q4 fiscal 2012 earnings. In what seems like a case of deja-vu, the stock slipped by a few percentage points in after market trading. What’s knocking Apple down this time? Well, they shipped a lower number of iPads than Wall Street expected in the quarter, and guidance for the holiday quarter is lower than expected. And the sooner we learn to ignore the short-term nature of Wall Street thinking, the better.

Just to recap, last quarter the stock dropped 5% in after market trading because of perceived weak iPhone sales and weak guidance. Then, within a few weeks, the stock had climbed from about $575 up to $700. Subsequently, it has now dropped back down to about $609. It’s a volatile stock and that’s just something you have to accept if you participate in the stock market.

The numbers

Let’s take a quick look at the key numbers: Apple delivered $36 billion in revenue and $8.66 in earnings per share (EPS). Gross margin was 40%. This is significantly better than guidance, but then again Apple is notorious for giving conservative guidance. Nothing has changed.

Apple’s largest product is the iPhone. In Q4 they sold 26.9 million units, which is up slightly from 26 million units last quarter. Customers knew the iPhone 5 was coming, and people obviously held off on iPhone purchases until it launched, considering the 5 million units sold in the first week after launch.

iPad sales were only 14 million units. This is down from 17 million last quarter, and Wall Street is a bit worried about this. Analysts expected more iPad sales, despite the fact that Apple says sales exceeded expectations. I wonder if people held off buying because of such huge anticipation for the iPad Mini, which Apple just announced this week. Still, iPad sales are up nicely on a year-over-year basis and are bound to be up dramatically in the December quarter. So I’m not worried.

Mac sales and iPod sales were solid, as usual. Macs continue to outgrow PCs, which means Apple is gaining on Microsoft in terms of OS market share. This is a trend that has been ongoing for many years, and shows now signs of slowing down. That’s great news for Apple shareholders.

Is profitability dropping?

During the Q&A session of the conference call, one analyst pointed out that if Apple’s guidance plays out, it will mean an earnings decline year-over year. Why would Apple tell Wall Street to expect the December quarter to be less profitable than last year’s comparable quarter?

CFO Peter Oppenheimer had a well-scripted and quite reasonable answer to this question. First of all, Apple’s December quarter will only be 13 weeks this year. Last year it was 14 weeks, so we should expect a 7% headwind from that alone.

But far more important is the huge refresh of products that Apple just threw at us. The iPhone 5 will be shipping for the entire quarter. The new 4th generation iPad and iPad Mini will ship for the bulk of the quarter. We’ve also got new 13” Macbook Pros and iMacs hitting us. I think Apple is correct in saying that they’ve never had a quarter with so many new products hitting all at once.

Here’s the thing about new products - they cost more to make than the prior generation of product. They have better screens, faster processors, and other component enhancements. This cost hits Apple, yet they don’t raise prices. Instead, they work their way down the cost curve over the life of the product. So the gross margin takes a hit. It’s a step change. And because Apple is launching so many products at the same time, it’s a lot of step changes in the wrong direction.

Apple is also introducing the iPad Mini, with a significantly lower price point versus other iPads. It has a lower gross margin. So profitability goes down.

As an investor, none of this bothers me so long as Apple can do two things. First, it has to prove that it can get costs down on new products just as it always has. This shouldn’t present much of a challenge. Second, they need to show me that the iPad Mini expands the overall market for iPads. If the Mini doesn’t accelerate iPad unit growth, then Wall Street can correctly say that Apple either canibalized its own profits, or was forced to take this step due to pricing pressure from competing 7” tablets.

If iPad sales improve with the new form factor, I look at is as Apple gaining more share and capitalizing on a portion of the market that was shopping elsewhere, or not buying tablets before. But if iPad sales don’t grow then Apple has simply lost profit, which is bad. For the record, I expect the former situation to unfold.

The bottom line

I’m pleased with Apple’s quarterly performance and I understand the reason for their guidance falling below Wall Street expectations. I take a longer term perspective on the business than most analysts and investors. I love the products they’ve just unveiled and it’s obvious to me that I’m more likely to increase my spending on Apple products than slow it down. If others feel the same way I do, that’s good for the stock.

In the mean time, if you are an Apple shareholder, learn to stomach the volatility. It’s not going away.

Former sell side analyst, out-of-box thinker, consultant, entrepreneur. Interests: Wife & kids, tech, NLP, fitness, travel, investing, 4HWW.

  • Hopefully, Apple has bottomed for the year. This is one roller coaster stock. www.beyondcareersuccess.com
  • this was always this way with AAPL, that used to give me a real headache as I was newbie to the stock... now I don't even bother to look at the chart... because I could predict the reaction on it... the moves after earnings or any negative comments by who tfck ever... are produced by nervous newbies scared to loose too much $ ... they act always in panic... there is no time for thinking... (that's is also the major reason for hedge-funds getting so rich....bin there.. done it my self... with the time you will realize, that short therm moves have no meaning... wait one year and be happy that U bought/didn't sold it... only what counts is P/E ratio, which is by AAPL way under it should be even with 700$ price for it... P/E average for any tech. comp is 30... so AAPL should be trading for 1324,5$
  • just checked P/E of AMZN its 2 636 and APPL's is 13,68 ... if APPL would have this P/E... its stock price would need to be 116 397 $... despite that ... APPL down 1% ... AMZN up 7%... WTF... unless Bezos buying all this stocks back... its unbelievable !!!
  • there is a typo Chris: * and shows now signs of slowing down. * it should be :* no signs of slowing down.
  • Apples making that money, samsungs only trying
  • Samsung actually makes a shit load of money. Samsung doesn't simply make phones. They make, Oil Tankers, Boats, Buildings (They built the Burj Dubai). They build oil platforms, wind farms. In the tech another thing is samsung makes chips, boards, screens and memory, among other things, and is a wholesaler to other companies like Apple. So even when other devices make money so does Samsung by selling them the parts they need. They build appliances like TVs, washers, dryers, refrigerators, etc. Samsung is like General Electric. People on tech websites tend to know only what is right in front of them. But Samsung has many divisions that do a ton of other things.
  • and... COPY MACHINES...which there are most famous for : )
  • Another good post. Although I'd take issue with the declining ipad sales having to do with the ipad mini. To be honest, I don't think the mainstream was putting off purchases waiting on the Mini and for the most part was probably unaware of it. It likely had more to do with Amazon's new Kindle offerings and the iphone 5. I expect the Mini will expand the market for them though. Apple is still a must buy. Especially when considering that competition. Amazon's strategy of selling devices at cost or loss isn't exactly paying off for them. MS still poses the big threat if they're able to leverage their windows base. It remains to be seen what kind of reaction people have to windows 8.
  • Not only there was rumors of the iPad mini... but there was also many about iPad refresh too... do not suggest a mainstream being stupid... the majority is always right... DUDE... no real threat from M$oft for couple of years at least... also...
  • Believe what you will..
  • U2... Bono
  • I hear what you are saying about the stock being volatile and that is all fine and good. However, there is a prevailing thought out there that Apple with out Mr. Jobs is not the same company. Much of what I have read in regard to their products has been not so stellar. The Ipad mini is a "me too" product which Apple has not released since before the original Ipod. Many people are getting tired of IOS and Android is gaining steam. This is a critical time for Apple, they need to get out in front again or this trend will continue.
  • i very much don't think they are the same level of direction. I know Tim Cook is excellent at his old job. I do wonder how good he is at the new one. Mostly I see very little in recent apple products that make me think. Man i really need that new version. That new version is really better then the last version. Take the iphone 5. It's a better phone. but to me, it's simply a hardware upgrade of screen and LTE and a front camera. The lack of much design change of the case strikes me as them simply coasting off their old designs. IO6 has very little difference between that and ios5. I'm not saying change for change sake but i'd think they'd have added many more new Apple brand apps. I mean that podcast app pails compared to say Downcast. Ipad 3 & "ipad 4" don't strike me as worth upgrading. Is that "ipad 4" truly all there is to the new version? Is there really not going to be a real new version next winter? They announce a 13 inch mac with retina. Ok but i'm kinda meh on that. And add to that the bungled launch of passbook, maps, the look of the podcast app? I don't know they all strike me as very not Jobs ish. That his reality distortion field would have said we get do those better or we hold the launch. I don't know. As an investor i have questions. I'm wary. It still makes money hand over fist though so I kinda just keep an observant eye on the trend of the company.
  • I stopped tracking apple a few months back but Apple historically sells off in after hours after earnings so that's not a surprise at all. I often sold into earnings, and rebought sometimes after a drop in after hours, but often added to my position in the days later. Especially when they'd have good earnings, a product like the iphone 4 coming out, i'd sell before the earnings, rebuy when it dropped to my target, Get an extra percentage point in growth as it climbed again on anticipation of the launch. Hell i'd often sell again in the earnings right after because they often didn't have new phone/product earnings in them and you know a sell off is coming. Then i'd rebuy again and spend all summer watching the stock climb as record sale reports came and people jumped back into the stock. As for the future. I honestly got more and more concerned with the apple direction months ago. Products they release these days are good but no wow. iphone 5 was nothing more the a big screen and lte. But nothing groundbreaking. macbooks changes are simply more expensive with a nicer screen. But for me it doesn't wow me. I don't think Apple is failing or anything remotely. but i do think it is plateauing. One thing that i think will help though is i think people will HATE Windows 8 and you may see growth in the Mac space at least among consumers. maybe not enterprise as much since if they are already on windows they may simply stay to save money. And i do question some of the execution by Tim Cook. But i expect, outside of ipads, the market for phones and stuff to get narrower not have apple growing by leaps and bounds.
  • Great article, and I largely agree. It seems long-term thinking and stock markets is an oxymoron these days (maybe even the thinking part). My question is... is Apple above being too adversely affected by the stupidity of the markets? Jobs seemed to have a way of managing the markets, so to speak, that might be now gone or damaged. I think that would be my main concern. My other concern is that they have too much in terms of $$$ in their eyes in the consumer markets, and might be forgetting about some other less glamours markets that are important to their overall ecosystem (a few products they've cut throw up some warning flags for me).