Apple Earnings Not so Sweet

 Apple Inc. (AAPL:NASDAQ) reported its most recent quarterly earnings yesterday disappointing analysts with a shortfall in profits although revenue expectations beat by $200 million.

How is this possible you may think… Higher sales, lower profits?

Answer lies in the shrinking gross margins. The cost to manufacturing Apple devices has risen and is expected to go up even further highlighted by the price of the new iPad mini which CFO Peter Oppenheimer warned will have gross margins “significantly below” even other Apple products which are already under margin pressures.

Here are some key highlights from the earnings webcast last night:

  • China sales were up 26% year over year (about even with total growth) and 15% of total company sales.
  • Cash balance stood at $121.3 billion with 82% offshore. Directly or indirectly with its Nevada based investment arm Braeburn Capital which apparently oversees the investment and management of that cash.
  • Next quarter guidance for revenue of $52 billion and EPS of $11.75, below a consensus of $55B and $15.41 but then again they are usually very conservative.

One period does not make a trend. However this quarter will no doubtly have many money managers whispering. Investors will have better idea on how gross margins and profit growth trajectory will be when Apple releases its next fiscal quarter earnings in January. Till then expect Apple to trade in a narrow range.

Our current analysis gives Apple shares a neutral rating from a previous short-term positive rating. Downside risk doesn’t justify upside potential in this quarter.