Fat Margins Make Apple Healthy and Investors Happy

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Source: http://www.flickr.com/photos/notahipster/4319949887/

Source: http://www.flickr.com/photos/notahipster/4319949887/

On January 27, Apple (NASDAQ:AAPL) reported fiscal first-quarter earnings that didn’t quite live up to Wall Street’s expectations. Never mind that revenue increased 5.7 percent to a record $57.6 billion for the quarter, beating the mean analyst estimate of $57.4 billion, and never mind that earnings increased 5 percent to $14.50 per diluted share, beating the mean analyst estimate of $14.08 per share — the first quarter was all about iPhone sales, and Apple missed the mark.

The “biggest issues with AAPL’s Dec-13 report,” wrote analysts at Piper Jaffray in a research note published shortly after earnings were released, is that “iPhone units missed Street estimates by 7% and the company implies iPhones may be close to flat y/y in March.” Sales estimates missed expectations “despite the addition of China Mobile (as well as DOCOMO and T-Mobile with no y/y comps).” Apple sold 51 million iPhones in the quarter, an all-time quarterly sales record that fell short of expectations for 55 million in sales. Actual iPhone unit sales grew 7 percent on the year compared with expectations for double-digit growth.

The miss triggered selling pressure, driving shares down 8 percent the day after earnings to about $500. In hindsight, the selling pressure may have been an overreaction, but it wasn’t totally without warrant. Apple has most of its eggs in one basket with the iPhone — the device accounted for 56.4 percent of Apple’s total revenue in its fiscal first quarter — and with so much of the business tied up in one device, the market sometimes substitutes the performance of the device for the performance of the company.

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