Apple Bulls Aren't Going to Like This


Apple has crossed a line that growth investors probably never saw coming. As analysts continue to whittle away at their profit targets on the tech giant, we can now officially say that Wall Street sees Apple posting lower earnings in fiscal 2013.

We're not just talking about the fiscal second quarter that's coming to a close today. The market's known for months that this would be the first time Apple posts a year-over-year decline in profitability for a quarter since 2003. We're now looking at an entire year of shrinking earnings on a per-share basis.

And I would've gotten away with it, too, if it weren't for those pesky Androids
Some underdog backers may argue that it's not a coincidence that Apple's prognosticators collectively turned within days of BlackBerry's stateside release of the first smartphone running the new BlackBerry 10 mobile operating system.

They're wrong, though. It's not the recent updates in BlackBerry or Windows Phone that are making Apple feel a bit more mortal. It's the growing global appetite for Google's Android -- and the margins that Apple is willing to sacrifice to make sure that it's not relegated to cranking out a niche product for the well-to-do -- that has Cupertino putting out cheaper iPads and keeping older iPhones around longer at lower price points.

After all, Wall Street still sees top-line growth. Analysts see Apple's revenue climbing 9% for the quarter and 16% for the fiscal year, though those numbers have also been pared back in recent weeks. Apple just isn't being afforded the same generous markups that it has in the past, and that's not going to change until Apple raises the bar of innovation again.

Let's check out how analyst profit estimates for Apple's fiscal 2013 have been scaled back in recent weeks.

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Source: Yahoo! Finance.

If you think that's swift justice from a pool of dozens of Wall Street modelers, the judgments for fiscal 2014 have fallen even harder. Over the past three months alone, analysts have gone from targeting $57.35 a share to $49.79.

Apple's stock has taken a beating in that time -- down 17% this quarter -- but it's not as if it has gotten that much cheaper as profit estimates have been pared back by 10% for this fiscal year and 13% come fiscal 2014.

The problem with kicking Apple when it's down
It's not just Apple getting the cold shoulder, either. Google, Mr. Softy, and most tech titans have seen their trackers lowering their income outlooks.

The whittling down isn't as pronounced as we're seeing with Apple, but it does defy gravity to see the tech-laden Nasdaq climb 8% during a quarter when most of its key components have seen their profit targets descend.

Apple is one of the few tech bellwethers that's actually cheaper than it was a few months ago, even after accounting for the gloomier near-term prospects. Yet it would be a mistake to assume that this will be the new normal, even if Apple hasn't helped its cause much by coming up short on the bottom line in two of the past three quarters.

After all, Apple isn't stupid. It knows it's out of favor. CEO Tim Cook knows he's a disappointing product launch or a few soft quarters away from facing a torch-carrying mob of people seeking change at the top. The clock is ticking.

In terms of existing products, Apple doesn't have the luxury of taking its time to refresh its product line. The iPhone 5S or iPhone 6 can't come out soon enough -- not because of BlackBerry's Z10 or the Windows-fueled Lumia phones, but because Samsung's Galaxy S4 is going to run away with the market next month, and that's even with its surprisingly stiff contract price of $250.

However, the one thing that will ultimately move Apple shares higher -- and ideally get analysts pushing their profit targets higher the way they used to until the latter half of last year -- is innovation. There's been plenty of debate about the merits of HDTVs, wristwatches, or whatever product category Apple may enter next. Is the market big enough? Can Apple command a healthy enough pricing premium to justify an entry? Will I even need the next Apple toy?

The thing about Apple is that no one knows the answer. The original iPhone did hit the market at a stiff price, but few people outside the corporate realm were buying smartphones at the time. The original iPad made more headlines for its hokey name than for its perceived functionality. Yet Apple went on to redefine one market and define the other.

It will do so again.

Growth-stock investors have moved on when it comes to Apple. They don't accept the margin contraction. The market had no problem pushing to new all-time highs earlier this year, even though its top and bottom lines were diverging. Operating income fell 22% in 2012. Net sales soared 27%. Investors forgive Amazon because they believe that Amazon's accepting near-term pain for long-term gain.

Isn't the same thing playing out at Apple? Instead of accepting that lower margins will be Apple's future, can't the argument be made that Apple's trying to grab market share for an ecosystem that it will radically reinvigorate in the coming months and years?

Apple's down, but it's certainly not out.

Another bite of the Apple
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Longtime Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends and owns shares of, Apple, and Google. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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