After the NASDAC market closes tonight Apple will announce its financial results for the quarter that ended on 31 December. The past three months have seen Apple's stock take a roller coaster ride, falling from the heights of $700 in September to around $500.
There has been a lot of speculation about the state of Apple's business that may have caused investors to lose confidence in the company. As a result these financial results may be the company’s most important in years, as suggested by Barclays analyst Ben Reitzes.
Back in October when Apple announced its fiscal fourth quarter results the company announced that it expected to report about $52 billion in revenue (which would be an increase of 12% from last year's $46.3 billion) and earnings of $11.75 per share for the October to December quarter (its fiscal first quarter of 2013).
This estimate shocked analysts who were expecting around $15.59 per share at the time. Apple's conservative estimates were due, it said, to the fact that it had so many new products coming out during the quarter.
While Apple has said it expects $52 billion in revenue, analysts have slightly better estimates; they expect sales of $54.7 billion, according to The Street's average.
Some of the most bullish of Apple followers have slightly higher estimations: Asymco's Horace Dediu expects $60b revenue; Jefferies Peter Misek predicts $59.55 billion revenue; while another AAPL bull, Gene Munster from Piper Jaffray, expects $53.85b revenue. We have a complete run down of analysts expectations here.
There's another reason why Apple may not perform so well in 2013's first fiscal quarter – the same quarter last year was 14 weeks, while the one to be reported tomorrow was 13 weeks.
Apple's income and expenses
Revenue is one thing. Bloomberg is warning that Apple is about to report a 2% drop in net income, reporting just $12.8 billion. That would be the first drop since 2003, and the slowest growth rate since 2009, that site claims. Back in January 2012, Apple announced that it had made $13.1 billion in profit.
Apple could post more revenue and less profit that the same quarter last year for a number of reasons.
One reason is rising production costs. Back in October Apple announced that it expected its profit margins to be lower because of the cost of overhauling its product lineup.
Another trend that might lead to less profit is a move by consumers to hold off updating or choose to buy cheaper phones. Apple still sells the iPhone 4 and 4S alongside the iPhone 5. The break down of sales between these devices is unlikely to be made clear by Apple, but the amount of profit attributed to iPhone could well be lower if more of the entry-level products are being sold.
Speaking of a cheaper iPhone, many are calling for Apple to introduce a lower-cost iPhone to appeal to customers in emerging markets where phones aren't subsidized. Any reduction in profit in the just gone quarter may point to exactly why Apple may not make a budget iPhone.
There is another way that Apple can make an impact in China. Apple needs to sign up China Mobile as a network provider. As we have reported before, China Mobile is the largest mobile services provider in the world, not just China. And as yet it doesn't offer the iPhone. "Brace yourself for heavy overseas sales once Apple works out a deal with China Mobile", writes Motely Fool.
Regarding the idea of the cheaper iPhone, many point to Apple's practice of cutting the price of older iPhones as new models come out. Although, as Associated Press notes: "A two-year-old iPhone 4 costs more than many new Android phones".
Which brings us to another reason why Apple may struggle to make as much profit this quarter.
Samsung competition and reduced iPhone sales
There is a suggestion that there has been a drop in iPhone demand in the just gone quarter, and the suggestion is that Samsung is to blame.
Apple's three iPhone models are up against 80 Samsung smartphones and countless other smartphones powered by Android, Microsoft and other operating systems. And, of course, Samsung's Galaxy IV out soon (probably around the time of Mobile World Congress in Barcelona this February), upping the stakes further.
Sterne Agee analyst Shaw Wu believes that press reports of reduced demand are misleading, however. iPhone 5 demand, he says, remains robust.
Other analysts are similarly hopeful. Asymco's Horace Dediu that Apple will have sold 55.5m iPhones; Jefferies' Peter Misek predicts 53m iPhones will have been sold; and Gene Munster from Piper Jaffray expects sales of 45m iPhones in the quarter.
And it may be the case that Samsung sales in the high-end smartphone category are not as high as thought. As we wrote earlier this week, the iPhone has outsold Samsung smartphones by 219 million to 131 million, according to an analyst.
Another point: Apple makes more money from sales of the iPhone than Samsung does from selling its smartphones. According to Canaccord Genuity, Apple collects about 60 percent of the profits in the smartphone market.
Apple's growth has to stop
However, Apple may struggle to maintain the sales in the high-end smartphone category. In the US more than half of mobile phone users now own a smartphone, according to IDC. The rest of the western world isn't far behind. The prevalence of smartphones in these developed countries means growth will slow as the market becomes saturated. (Hence the need to address the emerging markets of China and India).
Analyst Michael Morgan at ABI Research believes Apple's share of the global smartphone market will grow from 20.5 percent in 2012 to 22 percent this year and then remain flat, writes AP. Meanwhile, Samsung is already at 30 percent of the market, and is set to gain further dominance, he said.
Is it over for Apple?
The current value of Apple shares may cause observers to believe that investors have lost confidence, but of the analysts covering Apple, 52 have a buy rating.
Brian White at Topeka Capital Markets said: "The negative sentiment around the stock has reached epic levels that we haven't seen in recent memory and yet we believe the product portfolio has never been stronger."
Kathy Huberty of Morgan Stanley also urges investors that this is a good period to buy.
Whether it's a good idea to buy before Apple announces its earnings is a questionable move for short term investors, because while the company has exceeded analysts' estimates for earnings in all but three quarters since at least 2006, according to data compiled by Bloomberg, we often see a decline in value following results, even when they are promising.
It should also be noted that this isn't the only time Apple has seen a lot of value wiped of its share price. In 2008, in the midst of recession, Apple's stock fell by more than half, to under $100 per share, notes AP.
To put the price of AAPL in perspective, Motley Fool points out that AAPL is trading at a current trailing twelve month (ttm) P/E of 11, which makes it a relative bargain in the tech world. By comparison by comparison Microsoft has a ttm P/E of 14.7, and a market cap of $229 billion compared to Apple’s $470 billion, while Google has an expensive ttm P/E of 22 and a market cap of $230 billion, that site writes.
"Don’t let Apple’s recent stock-price drop scare you off. This is still a solid company with a strong future, and its shares are currently on sale," writes Motley Fool.