Although some have characterized this earnings report as meaningless, there are definitely a few key takeaways for shareholders.
Positive: Apple sold a lot of iPhones
Last week, I speculated that Apple could miss earnings. The company is still tremendously dependent on the iPhone for its revenue and profit, and rival smartphone companies have been posting disappointing quarters.
Apple Inc. (NASDAQ:AAPL)’s chief rival, Samsung, released its latest flagship smartphone — the Galaxy S4 — in April. From a purely technical standpoint, the S4 is a far better phone than the iPhone 5, boasting a full HD screen, a faster processor and better camera.
Still, despite refreshing its phone, Samsung warned of a disappointing quarter in June. The Galaxy S4 had a strong launch, but demand rapidly cooled. Officially, Samsung will report its quarterly results this Friday, and investors will get a better sense of how its Galaxy handsets are selling.
Yet, while Samsung struggles, Apple continues to sell phones. The 31.1 million iPhones sold was better than the 26 million analysts had been anticipating.
Negative: Apple didn’t sell that many iPads
However, Apple Inc. (NASDAQ:AAPL)’s iPad sales came up short. The company sold just 14.6 million iPads — 20% less than what analysts had expected.
Apple blamed the lack of a new model for the disappointing sales. Last year, Apple’s iPad 3 was still new, and consumers were just getting their hands on a Retina-display equipped device.
One quarter doesn’t necessarily make for a trend, but if it takes a completely new model to grow iPad sales, perhaps the market for iPads is saturating faster than observers had anticipated. Gartner was expecting the tablet market to grow 70% this year; perhaps that estimate is overly optimistic.
Of course, Apple Inc. (NASDAQ:AAPL) is seeing tablet competition like never before.
Microsoft Corporation (NASDAQ:MSFT) took a $900 million write-down last week on the Surface RT. The Window-maker has cut the price of its competing tablet by 30%, down to $350, while Apple continues to sell the full-sized iPad at $500. Microsoft Corporation (NASDAQ:MSFT) has also targeted the iPad in an aggressive advertising campaign.
Still, I think Apple investors should be more concerned with tablet saturation than with the company’s competitors.
Surface RT has been received poorly mostly due to its lack of apps. Even nine months post-launch, Microsoft’s app store continues to lack basic apps such as Facebook Inc (NASDAQ:FB).
Microsoft Corporation (NASDAQ:MSFT) certainly has the money to keep fighting the iPad, and based on the company’s recent reorganization, it seems like the Windows-maker isn’t giving up just yet.
But I think that’s a bigger strike against Microsoft Corporation (NASDAQ:MSFT) than it is a threat to Apple Inc. (NASDAQ:AAPL). The company could continue to waste billions pursuing a failed mobile strategy, while Apple’s iPad remains dominant.
Positive: new products are coming soon
Above all, Apple is a consumer products company. The iPod pulled the company back from the abyss, while the iPhone and iPad have powered the company’s tremendous growth over the last few years.
CFO Peter Oppenheimer promised more products this fall and in 2014. Whether they will be completely new devices (or just refreshed models) remains to be seen, but it’s no coincidence that the stock’s decline has coincided with a lack of new products.
A refreshed iPhone, iPad and iPad Mini are a given, but based on reports, a smartwatch, TV and cheaper iPhone could also be unveiled.
Negative: gross margin continues to decline
Apple Inc. (NASDAQ:AAPL)’s gross margin continues to fall. It’s now down to just 36.9% — from a high of 47% over a year ago. Apple expects gross margin to come in between 36% and 37% next quarter.
The longer Apple goes without introducing fundamentally new products, the more the company’s gross margin will decline. The iPad Mini now accounts for the majority of iPads sold, while the iPhone 4 continues to sell well.
If the rumors suggesting that Apple is planning to release a cheap, plastic iPhone this fall are true, gross margin should decline still further. Samsung — which offers smartphones at every price point — sells its cheapest handsets near cost.
Investing in Apple
The recent quarter wasn’t enough to change the case for Apple Inc. (NASDAQ:AAPL). Still, there are a few trends investors ought to keep their eyes on.
The better than expected iPhone sales should be seen as a positive sign, particularly because rivals (like Samsung) have warned of disappointing handset sales.
However, the drop in iPads is a bit troubling. Perhaps the tablet market won’t offer the growth many had hoped for — it could be nearing saturation. I don’t think the Surface RT, even at a much lower price, is a threat to the iPad, although Microsoft’s efforts to catch up are worth watching.
Ultimately, Apple’s future will come down to its new products. If the company can unveil some revolutionary devices, it could continue to grow. Otherwise, its gross margin will decline further, and the record quarters of the last few years won’t be repeated.
The article 2 Positives and 2 Negatives From Apple’s Earnings Report originally appeared on Fool.com and is written by Salvatore “Sam” Mattera.
Joe Kurtz has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple Inc. (NASDAQ:AAPL) and Microsoft Corporation (NASDAQ:MSFT). Salvatore “Sam” is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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