Sunday, April 27, 2014

Apple Just Stunned Wall Street

Apple Inc. (Nasdaq: AAPL) pleasantly surprised Wall Street by comfortably beating expectations when it reported earnings for its March quarter after the market close today (Wednesday).

The Cupertino, Calif.-based tech giant also threw existing holders of Apple stock several goodies, including an expansion of the stock buyback program, a seven-for-one stock split, and an 8% increase in the dividend.

The Apple stock buyback program will expand by $30 billion, to bring the total by 2015 to $130 billion.

The raft of happy news sent AAPL stock up more than 8% in after-hours trading.

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Apple reported earnings per share of $11.62, a healthy $1.46 above the $10.16 analysts had forecast as well as the $10.09 reported in the same quarter a year ago.

Revenue was $45.6 billion, which was $2 billion above both the year-ago quarter and analyst expectations.

apple earningsAnother pleasant surprise was higher gross margins, which came in at 39.3%. That, too, beat the forecast of 37.7% as well as the year-ago quarter number of 37.5%.

The good news was almost entirely driven by surprisingly strong iPhone sales. Apple sold 43.7 million iPhones in the quarter, a 17% increase over the same quarter last year and far above the Street's number of 37.7 million.

That's a positive sign for the current quarter in that it shows demand for the iPhone remained high despite the lack of any updates and rumors of iPhone models with larger screens (a 4.7-inch and a 5.5-inch) expected to arrive in the fall.

The only other sector to shine in the March quarter was iTunes/Software and Services, which saw revenue rise 11% to nearly $4.6 billion.

Mac sales were nearly flat, rising 1% by revenue and 5% by units. Meanwhile, iPad revenue slumped 13%, with unit sales falling 16%.

Still, the Apple earnings report hit a lot more high notes than anyone expected, particularly with the stock buyback and dividend increase.

But while the stellar earnings report will push Apple stock higher in the short term, it will take more than that to sustain a push back to $600 and beyond.

What Apple (Nasdaq: AAPL) Stock Really Needs

While the pop in iPhone sales was great, it pales next to the days of the 50% or even 100% growth that drove Apple stock from 2007 to 2012.

The reality is that the mobile revolution that Apple helped pioneer is reaching maturity - that was clear in the declining iPad sales.

Most of the people in the world who want a smartphone or tablet already have one by now; the market is almost all about replacements and repeat sales now. And while Apple is holding its own, mature markets don't generate the kind of numbers that can double a stock in a year.

Without that dramatic growth in sales of its mobile hardware, Apple stock has settled into a range between $500 and $575.

The strong earnings report has AAPL back at the top of the range, but is unlikely to push it back anywhere near its all-time highs.

Sure, new iPhones and iPads in the fall will help boost sales seasonally, and maybe give AAPL another short-term pop. But Apple stock can't break out of this range until the company comes out with some completely new product or service.

The rumor mills are full of possibilities here. Apple is alleged to be working on everything from a big-screen TV (very unlikely) to a smartwatch (very likely) to a mobile payment service (also very likely).

Some critics have already started calling for Apple Chief Executive Officer Tim Cook's head for his failure to deliver either new products or substantial growth in any of the existing ones. He doesn't need to fear for his job, but the change in Wall Street's mood is telling - and worrisome.

Apple is known not to debut products until it feels they are truly ready, but unless it actually brings out some major new thing in 2014, the company risks losing its status as a leading Silicon Valley innovator - with other tech titans like Google Inc. (Nasdaq: GOOG) and even Facebook Inc. (Nasdaq: FB) only too happy to fill the void.

Were you impressed by the Apple earnings beat? Where do you see AAPL stock headed in 2014 and 2015? Let us know on Twitter @moneymorning or Facebook.

Tech investing in the current markets can be tricky, so you need to find stocks with powerful potential for growth. And there's no better place to start than a company that's tapping into three of tech's hottest growth trends - data centers, the mobile wave, and cloud computing. It's clearly a winning combo...

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