Apple's Bravura Earnings Fail to Impress Investors

Make no mistake: Apple Computer has reached the upper echelon of PC/electronics companies. How do I know this? It's the only way to explain how Apple's quarterly earnings failed to impress analysts and investors, sending its stock price down sharply in after hours trading. On Tuesday, Apple announced record fourth quarter earnings, raising sales of iPod devices 220 percent year-over-year, and sales of Macintosh computers 48 percent year-over-year. Meanwhile, the company's revenue for the quarter quadrupled when compared with the same quarter a year earlier.

Sounds disappointing, doesn't it? In some ways, Apple is simply a victim of its own massive successes. While analysts had expected iPod sales to hit a lofty peak of 7.8 million units for the quarter, Apple instead sold 6.5 million units, a still-heady figure. But dig a big deeper and you'll see nothing but success here. Apple sold over 1 million iPod nanos in the final 17 days of the quarter in which that model was available, and could have sold much more. Apple described demand for the iPod nano as "staggering" but admitted it couldn't make enough of the devices to satisfy customers.

The Mac, perhaps, is even more successful, given the times. In June, Apple announced that it was switching its desktop and notebook PCs over to an Intel-based design, a multi-year shift that will require a lot of patience and work from its customers. Analysts immediately began opining that Mac sales would drop off dramatically at any moment, figuring that nervous customers would wait for Intel-based Macs to appear before buying. Not only has that not happened, Apple has actually grown sales in each of the subsequent quarters. In the most recently completed quarter, Apple sold 1.2 million Macs and derived 60 percent of its income from computer sales. Put in perspective, Apple's growth in the PC market is currently four times higher than the rest of the industry.

So what are we to make of all this? Apple completely dominates the digital music market and could announce its move into portable video as early as this month. Its customers seem unfazed--energized, even--by the move to Intel and provided the company with a welcome Mac sales boost during the crucial back-to-school selling period. By all rights, its Mac sales should be stagnant at best or down dramatically. And let's not forget that Apple's iPod competitors should have stepped up to the plate by now with a compelling alternative. That neither of these events has transpired suggests that Apple is on to something. And I'm sure investors will come around to that notion again.

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