The problem with kicking Apple when it’s down
It’s not just Apple Inc. (NASDAQ:AAPL) 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 Research In Motion Ltd (NASDAQ:BBRY)’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 Inc. (NASDAQ:AAPL) 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 Amazon.com, Inc. (NASDAQ:AMZN) 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.
The article Apple Bulls Aren’t Going to Like This originally appeared on Fool.com is written by Rick Munarriz.
Longtime Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Amazon.com, Apple, and Google.
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