What Wall Street missed in Apple’s Q313 earnings

“In business, as in life, there are things you can try to control, and things you can’t control at all. Apple’s third quarter fiscal report on Tuesday demonstrated the dichotomy,” Tiernan Ray reports for Barron’s. “”

“Apple sold 31.2 million smartphones in the quarter, up 20% year over year, and more than Wall Street had projected. Also very nice. But the average price declined 4% from the prior-year quarter, and fell from the fiscal second-quarter level, as many buyers sought out the cheaper iPhone 4 and 4S, versus the more expensive iPhone 5,” Ray reports. “Apple sold fewer iPads than expected, 14.6 million versus expectations of about 17 million. That was in part because the company didn’t refresh the iPad this spring as it had a year earlier with a high-resolution model, according to CEO Tim Cook. That was clearly a case of Apple just failing to come up with the goods necessary to spur another upgrade wave that would ensure the kind of cadence that Wall Street desires.”

Ray reports, “An especially dour report from Citigroup’s Glen Yeung on Thursday suggested in fact that there is nothing Apple can control. The market for smartphones will be completely saturated by next year in the U.S. and other developed markets, he opines… One thing was missing in Yeung’s grim assessment—the same thing many miss because they are focusing on Apple’s hardware units. Apple controls a platform, one of the two dominant platforms in mobile computing, its iOS software, which is an effective duopoly with Google’s Android. In the category of software and services, Apple sold $3.99 billion last quarter, which was up 25% from the year-earlier quarter. That was slower than the 37% growth recorded last year, but still impressive for a business running at $16 billion annually.”

Read more in the full article here.


  1. “The market for smartphones will be completely saturated by next year” . . . And the market for automobiles has been saturated for decades . . . That’s why nobody has bought a car in years!

    1. It really is astounding how deliberately shortsighted these analcysts insist upon being. They’re also flummoxed by anything more complicated than a 1-dimensional data curve.

      Therefore: These dummies are incapable of understanding Apple or its future. I think most of us here are far more adept than CitiGroup at analyzing Apple. 😯

      1. A week ago the “consensus” was claiming the smartphone market is saturated. Now they’re insisting it will be saturated by next year. That too is a figment of their cocaine-induced wet dreams. Not only is saturation farther off than that, but brand loyalty, ecosystem lock-in, and churn rate all favour Apple. Then there is the ticking time bomb called Apple TV—the fools never realised that, all along, Apple’s “hobby” is explosive devices.

    2. It’s not that no one will buy cars, I mean phones, it’s that the growth will slow to a crawl. Only people who have phones will continue to refresh their phones.

      Though I don’t believe this is the case yet either.

  2. Apple’s tactic is to take the high end market and gradually squeeze the competition by lowering price or bringing in cheaper models. It increases their revenue whilst slowly lowering margins.
    the effect on the competition is huge. Other manufacturers are forced to lower pricing and margin far more than Apple and increasing make less money by selling more units. As the market mature growth will be incremental but Apple will still control the best part of the market.
    Even though Samsung have increased their profits note that the unit volume has increased. They are having to sell a lot of phones to make that money. Going for market share rarely works unless you have a unique advantage. M$ had it in software and could dominant for 20 years. Apple have it in hardware and are still leading the way.

    1. I understand what you’re saying, but Apple is not even being valued for a multi-year view. Wall Street sees Amazon as a long play and values it as such whether the company misses its current earnings numbers or not. Wall Street definitely doesn’t see Apple as a long play, so again, Apple isn’t valued for short- or long-term. It’s only being valued for some miracle new product. That makes it very convenient for Wall Street to disregard Apple and continue to give it a low valuation as long as there is no miracle new product.

      Amazon was able to miss on earnings, forecast lower revenue and boom the stock shoots up even higher as target prices head for the moon. Why? Because everyone is sure Amazon can’t possibly lose in the future. No one has that kind of confidence in Apple. There doesn’t seem to be any way to get Wall Street to reward Apple shareholders.

      1. Wall shit will regret as despite the fact Apple seems to be losing and shares dropped a lot .
        Apple is actively buying its shares at a great big discount that in fact is the best investment which will benefit Apple in the end .

      2. Wall Street has no interest in rewarding Apple shareholders, but it is tightly focussed on screwing every last one of them over for its own gain because it can and will, and does.

      3. After Apple’s share price topped $700, there was a frenzy of profit taking. It’s hard to argue that wasn’t a reward. That kind of reward isn’t there at the moment, but there still remains a valuable opportunity to buy now and expect to sell higher in the future. That’s basic for most stocks, but APPL seems different in that analysts continue to seem confused about what Apple and its strategy actually are. That’s why valuation is lower than it should be according to those who do understand them. Miracle products have multi-year gestation periods before they are released and become “overnight” successes. Because of Apple’s policy of secrecy, nobody sees them coming. Wall Street doesn’t like surprises. It can’t see into the pipeline, and it just seems far more likely that there isn’t anything much in there, and less likely that vague assurances by the CEO will amount to anything. Without more supporting evidence, that kind of risk is unacceptable to conventional investors, seeming too much like a dubious leap of faith.

  3. This is the same Glen Yeung that forecast 17m iPhones last quarter vs. 31.2m actual. That ANYBODY takes this fool seriously is mind-numbing. If you invest with Citi’s advice, you deserve to go broke.

    1. Thanks, blaargh, for pointing this out. Most analysts are morons, but this one more than most. In the days since Apple released results, there has been a lot of butt-covering going on. This piece is part of that pattern.

  4. This “saturation” theory is stupid, because the subsidy model is designed to produce a two-year upgrade cycle. The next iPhone is designed to replace the iPhone of existing customers with iPhone 4S (or earlier). For that group, even the current iPhone 5 would be a good upgrade, so an improved iPhone 5 (the “5S”) is a great upgrade.

    Apple’s goal is to make the each “next” iPhone a desirable product for existing customers of two-year-old iPhones, NOT the previous model.

    So, it doesn’t matter if a large percentage of potential customers already have an iPhone. When that contract expires, most will upgrade to the latest model. Yes, there are markets that do not use the subsidy model, but those markets tend to be less saturated, at least for Apple, because the up-front FULL cost of an iPhone is high. And Apple has large growth potential in such markets with the rumored lower-cost phones.

    Also, the point about “the average price declined 4%” is mostly irrelevant. It’s profit per unit that matters, not the average price. Because of the subsidy from the carrier, the profit from each iPhone sold is comparable, no matter which model the customer selects. Therefore, the less expensive older models do cannibalize sales from the latest model, but Apple does not really care. The important thing is that the customer bought an iPhone.

    1. Also, production costs for iPhones must decline with the unit volumes seen. Like a short-order cook flipping flapjacks on a hot griddle …once production ramps up and the experience curve turns flat.

  5. These analysts seem out of touch with tech. They don’t understand how popular Apple products are with people. Then they spread Apple FUD because of this. It’s sad, really.

  6. Unreal.. Apple bashing on in full force ..
    Citi screwed up on the earnings estimates… Now they are screaming bs to cover their screwup.

    I am convinced Samsung, Google Comcast have an orcestrated and concerted agenda to constantly downtalk apple through paid bashers!
    Pathetic … And oathetic that macdaily gives these bs credence!

    1. MDN is not giving the BSers credence, not a bit of it. What they are doing (besides earning a spot of cash from jittery clickers) is giving you and me a chance to voice our opinion about it all. I do believe that MDN, in a financial jam, would post an article under the flimsiest pretense imaginable. I’m not exactly saying you or I would stoop to doing the same, but we are talking about human nature, which was the inspiration for the forging of the Ten Commandments.

  7. The other thing that gets left out of the projections is that Apple people are far less likely to jump to Android, Windows Phone, Bada, Blackberry OS, etc. Non-Apple users are much more likely to leave their OS and go to Apple iOS. Therefore Apple has further to grow even after the smartphone market is “saturated.”

  8. Some people here appear to be confused about what saturation means. Nobody is saying that when the market is saturated that iPhones will stop being sold. What they’re saying is that when the market becomes saturated, *growth* will stall. Apple will go from high growth in sales from the iPhone in the US, to being dependent on an upgrade cycle base on 1-year or 2-year upgrades.

    It’s also worth noting that not only has smartphone adoption in the US started to hit a saturation point, smartphone technology will hit a point where making an upgrade worthy phone will be harder and harder to do in as short time periods as we’ve been experiencing.

    Just looking at the iPhone business itself, and subtracting out the entire halo and ecosystem, the iPhone business would still be a great business. Additional growth could come from switchers, but that too must become saturated at some point.

    Saturation is inevitable, and always has been. Again, just looking at the hypothetical iPhone-only if it was a business all to itself with no halo or ecosystem, what you’d find is that iPhone “Inc.” would see its stock hit an equilibrium level where stabilization would occur due to predicted and delivered upon results and profits turning into dividends.

    This differs from iPhone “Inc. – the start up”, where investors are betting on the growth of the company.

    Another way to look at this…

    In the US, the iPhone is soon becoming a really rock solid foundation to support Apple as a whole, as compared to what it was ***perceived by the market as*** a couple of years ago… a chaotic rocket capable of boosting Apple to the stratosphere and beyond, or crash and burning.

    While the iPhone did in fact rocket-propel Apple upwards, it’s a great thing to look at the iPhone in the US as a rock solid business as Apple continues to rocket the iPhone in foreign markets (which too will become saturated at some point) and rockets in other areas (iPad, content, etc…).

    TL;DR: Saturation isn’t talking about sales stopping, just *growth* in sales stalling. Being dominant or at least one half of a duopoly is a great business. Apple has plenty of growth opportunities with the iPhone in other areas and with other products and services.

    1. Interesting post – I was thinking the same thing but did not know how to articulate it. So, when growth slowed in the regular mobile phone business, and took off in the “smart” phone business, obviously it made the feature phone market shrink. It also became the opportunity for Apple to take market share – which it did in an amazingly short period of time. I’m guessing this is why innovation in certain markets is often pushed forward to refresh an industry. For instance HDTV was the new thing, and took over sales of lower resolution TV’s. You can also see that kind of thing flop, like with 3-D TV never really catching on. The potential market for new customers for smart phone might indeed be getting saturated. So then someone will attempt to reset the market with the UltraSmart Phone, and the most likely place that will come from seems to be Apple. Obviously though, there is still a limit to the total need for communication devices, somewhere near the total population of earth – which is why Apple will continue to push into new markets.

  9. Saturation means that the market is not growing. At that point the market becomes a win-lose proposition and the most important point is the churn. If you look at any of the current studies of the churn rates for the systems and vendors, IOS and Apple win hands down. If the current estimates are correct, Apple will end up with 80-90 percent of the phone marketplace. Clearly this change will not occur until after the conversion of feature phones to smart phones is complete and that appears to be 3-5 years in the future.


  10. Analyst are never concerned with getting things right, they are concerned with moving stock be it buying or selling doesn’t matter they make money either way.

  11. Hafta say I’m soooo weary of these half-witted doomster reports and grim suppositions.

    Doubt if things will change whatever tech-delights come our way, as kicking top-of-the-hill Apple gets hits.

    1. With you all the way.

      After enough time has passed and a surfeit of these bogus stories has caused a slump in website craze hit counts, we can expect the slavering jackals of tech reporting to refocus on a new carcass to gnaw at—and because of Apple’s slay rate, there’ll be plenty of candidates.

  12. How many “coming of age to have a phone” young female and male pre-teens and early teens prefer iPhones? The numbers are great, not saturated, and loyal once in the eco-system.
    At middle class and above families the % of new adapters is quite high and starts at earlier and earlier grades. For some it is fashion, others it is safety and the parents will pay the price.

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