Apple misses earnings estimates

Growth in Apple’s profits dramatically slowed and sales fell short of Wall Street’s expectations, reinforcing concerns among investors that the consumer electronic giant’s days of white-hot growth may be over.

Apple sold 47.8 million iPhones, its most important product, between October and December, an all-time record, the company reported Wednesday. But that did little to impress Wall Street investors who rushed to sell off the stock late on Wednesday, sending shares down a whopping 10 percent in after-hours trading.

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Apple's stock price and fourth-quarter 2013 sales.
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Apple's stock price and fourth-quarter 2013 sales.

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Since peaking at $705 a share in September, Apple’s stock has now lost nearly 35 percent of its value. Shares fell to around $460 per share in after-hours trading, after closing at $514.17.

That loss has been felt by a wide swath of average Americans. For nearly a decade, Apple’s shares saw a gravity-defying climb, eventually making the company the most valuable in the world. Quarter after quarter, the firm beat even the most optimistic expectations, as consumers snapped up iPhones and iPads in record numbers.

Along the way, retirement funds and mutual funds bought shares, making the stock one of the most widely held in the world.

But many analysts now question whether Apple can keep up that pace and whether the company’s product pipeline is starved of breakthrough products. Its top-selling product, the iPhone, has been overtaken by less expensive rivals. And a misstep on its release of an Apple mapping program and an ensuing executive shuffle also shook confidence in the firm’s direction.

In a conference call Wednesday, Chief Executive Tim Cook said Apple would be unwilling to lower the quality of its products to maintain marketshare with cheaper devices.

“We aren’t interested in revenue for revenue’s sake,” Cook said. “We could put the Apple brand on a lot of things and sell a lot more stuff.”

The race to capture overseas markets have become critical for smartphone makers. More than 60 percent of Apple sales come from outside North America.

Samsung, in particular, has been aggressively going after the demanding high-end market that’s been Apple’s bread and butter. But the Korean tech giant is also able to move into a lower-end market overseas, somewhere Apple still cannot follow.

The iPhone remains expensive in developing nations such as China where telecom companies do not offer large subsidies to consumers. The company is sixth in marketshare in China and 10th in India, said International Data Corp. analyst Ramon Llamas.

In the United States, Apple may already be reaching a saturation point on the high-end of the market. Sales figures for Verizon Wireless earlier this week showed that less than half of new iPhone sales were for the latest model, indicating strong demand for cheaper, older iPhones even in the world’s most developed markets.

Older versions of the iPhone are also popular in China, said Bryan Wang, a Forrester analyst based in Singapore. Many consumers there get iPhones through resellers or back channels, meaning that if carriers in China provided subsidies similar to those in the United States, he said, Apple could see enormous growth.

Many analysts say Apple has to broaden its appeal to continue its success, but cautioned that comes with its own risks.

“Apple is successful based on the margin they get per device,” said Adam Leach, a tech analyst for Ovum. “Losing that edge would also be seen as a risk factor to investors.”

Even with the company’s miss Wednesday, analysts say it’s still far too early to count Apple out or to say that it’s hit its zenith.

“There’s not complete information to know if Apple really has peaked because we don’t know what its future products will be,” said Forrester analyst Sarah Rotman Epps. She also noted that Apple’s product focus has always been on bringing consumers a complete hardware and software experience, not on leading the market with cutting-edge technology.

“That’s not an expectation that Apple will ever meet because it’s not what they’re trying to do,” she said.

Apple posted $54.5 billion in revenue for the quarter, up from $46.3 billion. The firm matched last year’s net profit figure at $13.1 billion. Apple’s reporting period for this quarter was a week shorter than the same period last year.

For its part, Apple pointed to supply constraints for its iPad mini tablet and Mac computers, combined with a weak dollar, as reasons that revenue was not as high as analysts had projected. Cook also cautioned investors not to put too much faith in reports that the company is cutting screen orders after facing weak demand for iPhones, saying that it is impossible to understand the company’s supply chain from one data point.

Apple sold 22.9 million iPads, about in line with investor expectations.

 
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