Apple and the Terrible, Horrible, No Good, Very Bad, Record-Breaking Quarter

Apple Earnings Q1 2016

Apple bloggers typically have trouble understanding the market’s reaction when things turn south after Apple reports a phenomenal quarter, but even they understood investor trepidation following Apple’s quarterly report on Tuesday afternoon. At $18.4 billion, the company posted the most profitable quarter in history, topping its own prior record by nearly half a billion dollars. Exxon’s $15.9 billion quarter had been the record until last year when Apple smashed it with an $18 billion December quarter.

During this more recent holiday quarter, Apple also managed to narrowly top the revenue and iPhone sales figures it posted last year, coming in at $75.9 billion and 74.8 million, respectively. Both figures marked records for the company, but both figures also missed analysts’ expectations. That wasn’t the real problem, however. The real problem was that Apple finally confirmed fears that have been swirling for the past few months: In the coming quarters, iPhone sales will fall.

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In 2014, Apple finally released new iPhone models with substantially larger displays. This sent a wave of people rushing to upgrade the party lasted all year long. When the updated iPhone 6s and iPhone 6s Plus were released in 2015, of course there was another rush of upgrades, but there were signs on day 1 that the inevitable was about to happen. My sarcastic tweet from back in September:

Apple did its best to show growth when it touted yet another record-setting preorder period, but it had to use some tactics that anyone with a pair of eyes should have seen right through. Yes, preorders ended up narrowly topping the prior year, but there was an extra week for customers to preorder their phones… AND the 6s and 6s Plus were launching in China at the same time as other first-round markets, which was not the case in 2014.

In any event, things are playing out much how I and many others expected them to. Apple’s 6s upgrade is a huge one — Apple’s biggest ever, in my opinion — but these phones don’t offer the same novelty that the iPhone 6 and iPhone 6 Plus did in 2014.

The iPhone 7? Well, that might be a different story, but we still have two quarters of uneasiness to endure before we get to that hotly anticipated launch. And those quarters may be tumultuous indeed — consider this: the iPhone is obviously the star of Apple’s product lineup and Apple sold more iPhones last quarter than it ever has in any three-month period. Sales growth was practically nonexistent though, to the point where Apple didn’t even share sales numbers in its press release.

The first and second calendar quarters are going to be tricky ones for investors and analysts alike. And speaking of analysts, the Street is still overwhelmingly bullish on Apple shares despite the uncertainty of the coming quarters. Apple shares have been on a rollercoaster ride since the company’s financials were released, but the bulls are already on parade.

Some take the viewpoint that negative iPhone sales growth is already built into Apple’s share price. So says Drexel Hamilton’s Brian White, longtime Apple champion, who maintained his sky-high $200 price target on the company’s stock in a note to investors on Wednesday morning.

“Given the iPhone weakness in the late stages of this 6-Series and growing macro economic weakness around the world, it is not surprising that Apple’s 2Q:FY16 outlook was soft but still within the range that we believe the market had thought was possible,” White wrote. “As such, we believe incremental weakness is already reflected in Apple’s stock at just 7x our CY:17 EPS estimate (ex-cash) and our model indicates that 2Q:FY16 will be the trough in Apple’s operating profit cycle and the sales cycle will bottom out in 3Q:FY16.”

White might still hold what some believe to be a comically high price target on Apple shares, but he’s hardly alone in thinking that Apple is prime for a rebound. There were indeed some downward revisions following Apple’s FQ1 report on Tuesday afternoon, but plenty of big firms remain bullish on Apple’s stock, including Morgan Stanley, Macquarie (PT: $117), Baird (PT: $130), Stifel (PT: $120), FBR (PT: $130), Pacific Crest, Credit Suisse (PT: $140) and Barclays (PT: $142).

What does the future hold for Apple? No one really knows — not even Apple. There are a few things we can say with some certainty though, and we’ve been saying them for years now. No company or product can maintain the type of growth that Apple and the iPhone have enjoyed for the better part of the last decade. It’s just not possible. That said, there’s still plenty of room for new records at a decelerated pace. Apple will launch completely redesigned iPhones later this year that will spark a fresh new upgrade cycle, and there’s plenty more to come down the road.

Dollars and Sense is a recurring column by BGR Executive Editor Zach Epstein. It offers insights on subtle changes in and around consumer electronics with the potential to have a broad impact on companies that drive the industry. Contact the author at z@bgr.com.

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