Ordinarily, if a casual observer heard one of the world’s largest companies had grown its revenues and profits by more than a third they would consider that a strong performance.
But Apple is held to a different standard by Wall Street and after iPhone sales came in slightly lower than investors hoped, they wiped $60 billion (€55 billion) off its valuation in after-hours trading on Tuesday night.
For keen Apple watchers, this pattern has become all too familiar: the company stuns investors with a series of strong, forecast-busting quarters; the stock rallies, as it had this year by around 18 per cent before Tuesday’s earnings; and then shareholders panic when its results fail to match their ever-rising expectations.
"There's a strong sense of history repeating itself," said Geoff Blaber, analyst at CCS Insight. "They've outperformed every quarter but you cannot continue to do that indefinitely. They are at this point where any slight miss, investors knee-jerk."
The question hanging over Tim Cook, Apple's chief executive, is whether Tuesday's reaction signals a repeat of this time last year, when Wall Street quickly shrugged off a quarterly report that failed to trounce its forecasts, or 2012, when concerns about the iPhone's longer-term growth sent its share price tumbling for months.
“I suspect that the big challenge by the second half of 2016 is that iPhone growth does start to slow,” Mr Blaber said. “The question then is, where does that growth come from?”
During Tuesday's earnings call, analysts pressed Mr Cook on the prospects for two potential engines of growth: China, in the near term, and the new Apple Watch.
The fluctuations of the Chinese stock market have raised questions over the spending power of its middle class, who are driving the iPhone’s popularity in Apple’s second-largest market.
But Mr Cook brushed aside those concerns. “We remain extremely bullish on China and we’re continuing to invest,” he said. Only a “fairly narrow” portion of the Chinese population play the stock market, he suggested, with a “smaller portion of their wealth” than Americans. For Apple at least, “this worry is probably overstated”, he said.
"It should not be a surprise to see sequential declines given the retail purchase activity around the Chinese new year in February," said Walt Piecyk of BTIG Research.
However, Apple’s commentary around the Watch was less straightforward.
Apple warned analysts last year it would not break out sales figures for the Watch for competitive reasons, lumping them in with headphones, iPods and other accessories in its catch-all “Other Products” category. This segment saw sales increase 49 per cent to $2.6bn in the latest quarter, initially causing confusion among some analysts.
Assuming an average selling price of $550 (the devices cost between $350 and $17000) Gene Munster at Piper Jaffray, the investment bank, made an initial calculation that Apple might have sold just 1.2m Watches, far below his earlier forecast of 3m.
But after being questioned by Mr Munster, Mr Cook presented a more confident outlook in the hopes that analysts might “avoid reaching a wrong conclusion”. Because the iPod and other accessories saw revenue declines in the quarter, Watch sales were greater than the entire “Other Products” category’s growth, implying revenue of at least $1bn for the new device in its first nine weeks.
“Sales of the Watch did exceed our expectations and they did so despite supply still trailing demand at the end of the quarter,” he said.
Mr Cook also said that Apple Watch sold more than the iPhone and the iPad. With more than 3 million units in its first quarter, Apple’s tablet computer made a strong debut when it launched in 2010.
So Mr Munster subsequently revised up his estimate for Watch sales to 2.5m, with many other analysts settling around a similar number. While many suggest this already makes Apple Watch the top-selling smartwatch available, it nonetheless fell short of analysts’ hopes that sales might reach 3-5m for that period. Mr Piecyk slashed his prediction for the September quarter’s sales from 8.9m to 5m as a result.
“It’s difficult to forecast this product, for sure, but we are still optimistic about the potential for a higher attachment rate as we enter the holiday season.”
If indeed there was a shortfall, Mr Cook seemed not too worried. “Our objective for the quarter wasn’t primarily sales,” he said. Instead, he pointed to the 8,500 Watch apps available and a survey by analysts at Wristly suggesting a customer satisfaction rate of 97 per cent, ahead of the first iPhone or iPad models.
He said experience had shown that if customer satisfaction is high, “you can wind up doing well over time”, adding: “We’re convinced that the Watch is going to be one of the top gifts of the holiday season.”
Whether Wall Street is convinced will become clear only in the coming months.
Copyright The Financial Times Limited 2015
