Market Overview

Apple Earnings Preview: Expectations Are Too High


Last time on the hit soap opera, "As The World Turns…Around Apple," more than 37 million people purchased the iPhone 4S, prompting a plethora of new investors to jump on the Apple (NASDAQ: AAPL) bandwagon.

During its fiscal first quarter, Apple reported an EPS of $13.87 on sales of $46.3 billion -- well above the analyst expectations of $10.08 a share on revenue of $38.85 billion.

The company achieved such high sales by moving an additional 15.4 million iPads (versus 13.5 million anticipated) and 5.2 million Macs. In the day following these announcements, Apple shares rose 9%. By the end of January, Apple shares had increased 7.75% from the day the company's earnings were reported.

As of February 29, Apple had added another 19.74%. By the end of March, Apple shares had increased risen by an additional 10.5%.

That was impressive, but it's old news now. Apple closed yesterday at $571.70 -- a 4.65% decrease from March 30. But that, too, is old news. All investors care about now is what happens today after the close. Can Apple thrive again? Or is the company destined to disappoint?

"First of all, I think expectations have gone too high on Apple," Trip Chowdhry, the Managing Director of Equity Research at Global Equities Research, told Benzinga. "Not that the business is falling apart, [but] I think people have gotten too euphoric that Apple products are going to go gangbusters. I think many investors have missed on the fact that the environment in which Apple products are displayed is terrible."

That "environment" includes higher gas prices, among other economic challenges that the world is facing.

"Apple is changing," Chowdhry explained. "They have a lot of things to do, some of which people do not think the CEO [Tim Cook] is focused on. Three things: first we have to put the context into place. Today's Apple is different from Steve Jobs' Apple. Is it good or is it bad? I'll let the investor think about it."

Chowdhry may be willing to let investors think about it, but that doesn't mean he isn't going to share his opinion. "I think it's bad because it is a fundamental shift in [the company]," he said. "For Steve Jobs, his focus was only users -- users, users, users. [If people] use the products, [they] will increase revenue, and more revenue leads to a higher stock price, [and] investors are happy. That was his logic. Product, users; product, users -- again and again -- and shareholders are taken care of.

"[Compare that to] the current CEO's focus, which is shareholders first. It is okay for the short-term horizon. But it is not a recipe for continued success."

Chowdhry noted that under the guidance of Tim Cook, Apple issued a dividend and announced a share buyback program. "I'm not saying it's bad," Chowdhry insisted. "[But] you can see dividends and share buyback programs are not a recipe for success for a company that wants to be on a growth spurt. We have seen that in Microsoft (NASDAQ: MSFT). We have seen that in Cisco (NASDAQ: CSCO).

"Second, today, almost with the exception of a handful of international markets, I would say the majority of Apple stores in USA look old, filthy and small versus what Microsoft stores are versus the new stores that Sony (NYSE: SNE) is making."

Chowdhry wanted it to be clear that he in no way is trying to imply that Microsoft's business is going through the roof. "But our research over the last three days has showed more traffic in Microsoft's stores versus Apple stores," he said. "This basically tells you that the current CEO has no pulse on the shift that happens so fast in this industry. Steve Jobs had the pulse on the user, the customer, the marketplace. And before the market reacted he would react."

Steve Jobs would have never allowed Microsoft's retail outlets to surpass his chain of Apple stores, Chowdhry insisted. "He would have pushed full steam ahead to make sure that things were in his backyard, versus the catch-up that Apple has to play. This is the first time under the new CEO that Apple is in a catch-up mode when it comes to its retail stores."

Further, Chowdhry does not believe that Apple is operating properly.

"The company should operate with some common sense," said Chowdhry. "In an environment where you know the customer is getting hurt [financially], Apple should be coming out with products and their promotions and their messaging which are in line with the customer spending habits. You have to change when the customer is getting pinched. We have not seen that. Apple, under the new CEO, is somewhat running under the old rulebook."

"A smart company changes when the customer changes," Chowdhry continued. "The customer is changing; Apple is not."

Follow me @LouisBedigian

Posted-In: Analyst Color Earnings News Previews Success Stories Analyst Ratings Tech Trading Ideas Best of Benzinga


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