NEW YORK (TheStreet) -- Weaker than expected iPhone sales and uncertainty surrounding the Apple Watch caused Apple (AAPL) - Get Apple Inc. (AAPL) Report shares to drop more than 5% in early Wednesday trading after the tech giant reported its third-quarter earnings Tuesday afternoon.
For the quarter, Apple sold 47.5 million iPhones, compared to 35.2 million in the year-ago quarter. Buy-side analysts had predicted that Apple would sell almost 50 million iPhones in the quarter.
The Cupertino, Calif.-based company refused to break out sales numbers for the Apple Watch. On the conference call, CEO Timothy D. Cook only said that Watch sales have "exceeded our expectations."
Overall, the company beat top- and bottom-line estimates, reporting earnings of $1.85 per share on $49.6 billion in revenue, as revenue rose 33% year over year. Apple was expected to generate $49.3 billion in revenue, with earnings per share of $1.80, according to analysts surveyed by Thomson Reuters.
Shares of Apple were falling sharply early Wednesday, down 5.2% to $123.92.
Cook also said the company's future in China is bright, with quarterly revenue growth of 112% compared to the year-ago quarter, and iPhone unit growth of 87%. But Cook noted there could be some bumps in the near term due to economic volatility.
"Nothing that's happened has changed our fundamental view that China will be Apple's largest market at some point in the future," Cook said during the earnings call. "It's true, as you point out, that the equity markets have recently been volatile. This could create some speed bumps in the near term. "
Here's what analysts had to say about Apple's earnings.
JPMorgan analyst Rod Hall (Overweight)
"Apple delivered a slight beat in FQ3 in spite of continuing FX headwinds but guided slightly weak due mainly to higher than expected opex. iPhone inventory was down by 600k units but this was in line with the Q/Q drop seen in FQ3'13 after the launch of the iPhone 5. No mention of demand weakness was made on the call and China results and commentary were positive."
JMP Securities analyst Alex Guana (Outperform, $150 price target)
"Other factors driving our recommendation include our view that: 1) its target markets are far from saturated, with iPhones still less than 20% penetrated into cellular, Macs less than 10% penetrated into computing, and Apple Pay, Swift, HomeKit, and HealthKit less than 1% penetrated into a significant Internet-of-Things opportunity; 2) larger percentages of its revenue streams are entrenching and becoming recurring as Apple Pay and Enterprise initiatives progress; and 3) Apple is proving itself in Greater China, where its sales growth accelerated to 81% y/y from 70% in the prior quarter."
Citigroup analyst Jim Suva (Buy, $145 price target)
"Negatives: 1) iPhone units of 47.5 million +35% y/y miss whisper of 50m+ which became elevated within the recent days. 2) iPad units down -18% y/y to 10.9 million slightly below consensus at 11.1 million. 3) Comparisons become increasingly more difficult in the quarters ahead setting up for a handoff from high growth iPhone units of +37% in F15 to only +1% in F16 to +8% in F17, which we believe may cause Apple stock to be a source of funds for the near term until investors better grasp this transition."
Cantor Fitzgerald analyst Brian White (Buy, $195 price target)
"We believe Apple is in the midst of a transformational, super cycle with a notably stronger iPhone cycle and our expectation that Apple Watch will be the 'go to' gift this holiday season. Despite a slight shortfall relative to our recently raised iPhone unit forecast for the June quarter, the momentum of this iPhone cycle is notably stronger compared to those in the past, which we believe is driven by the larger screen sizes of the iPhone 6/6 Plus, combined with strength in emerging markets and the growing attraction of Apple's robust digital ecosystem."
BMO Capital Markets analyst Keith Bachman (Outperform, $145 price target)
"Our published iPhone estimate for the June quarter was 48 million units, but to be fair, we thought upside tension existed to 50 million. Hence, the stock will need to retreat some in the near-term despite the Apple story remaining compelling. In the June 2015 quarter, iPhone units declined by 22% q/q. In the June 2013 and 2014 quarters, iPhone units declined by an average of 18% q/q. However, December 2014 and March 2015 quarter's unit growth on an absolute basis was much stronger than past years. Finally, we believe that implied Watch growth was disappointing, with our math suggesting about 2.3 million units in the June quarter."
Deutsche Bank analyst Sherri Scribner (Hold, $125 price target)
"While results modestly beat published estimates, iPhone and Mac units were only in line with Street estimates and iPad modestly missed. We estimate that Watch shipments were roughly 2.7M in F3Q-15, which was also lower than Consensus expectations of 3.9M units. With results only meeting Street expectations and missing higher investor expectations, we believe the shares will be challenged. We continue to worry that recent iPhone strength and high market share are unsustainable, and we expect growth rates to decelerate as we anniversary the iPhone 6/6+ introduction later this year."
Credit Suisse analyst Kulbinder Garcha (Outperform, $145 price target)
"The other product category saw revenues of $2.6bn, up $952mn q/q. While Apple didn't disclose the Watch shipments, we believe that the company shipped 2.5mn units, close to our expectations. We now project Watches of 6.5mn/28mn in FY15/16."
Jefferies analyst Sundeep Bajikar (Hold, $135 price target)
"Our checks at MWC-Shanghai suggest Apple is facing strong competition on a technology basis, from lower-priced Android-powered Smartphones, particularly from Huaweiand Xiaomi. However, our checks also suggest consumers in China have favored iPhone over premium offerings from Samsung or lower priced domestic alternatives, due to Apple's superior brand image. Apple's Smartphone market share in China has stepped up from ~6% to 18% over the last 9 months, and compares with 37%, 21%, 45%, and 34% in the U.S., Europe, Japan, and Korea, respectively."
TheStreet Ratings team rates APPLE INC as a Buy with a ratings score of B+. TheStreet Ratings Team has this to say about their recommendation:
"We rate APPLE INC (AAPL) a BUY. This is driven by multiple strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its solid stock price performance, impressive record of earnings per share growth, compelling growth in net income, robust revenue growth and notable return on equity. Although the company may harbor some minor weaknesses, we feel they are unlikely to have a significant impact on results."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- Powered by its strong earnings growth of 40.36% and other important driving factors, this stock has surged by 35.58% over the past year, outperforming the rise in the S&P 500 Index during the same period. Regarding the stock's future course, although almost any stock can fall in a broad market decline, AAPL should continue to move higher despite the fact that it has already enjoyed a very nice gain in the past year.
- APPLE INC has improved earnings per share by 40.4% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, APPLE INC increased its bottom line by earning $6.43 versus $5.66 in the prior year. This year, the market expects an improvement in earnings ($9.07 versus $6.43).
- The net income growth from the same quarter one year ago has greatly exceeded that of the S&P 500, but is less than that of the Computers & Peripherals industry average. The net income increased by 32.7% when compared to the same quarter one year prior, rising from $10,223.00 million to $13,569.00 million.
- Despite its growing revenue, the company underperformed as compared with the industry average of 32.7%. Since the same quarter one year prior, revenues rose by 27.1%. Growth in the company's revenue appears to have helped boost the earnings per share.
- Current return on equity exceeded its ROE from the same quarter one year prior. This is a clear sign of strength within the company. When compared to other companies in the Computers & Peripherals industry and the overall market, APPLE INC's return on equity exceeds that of the industry average and significantly exceeds that of the S&P 500.
You can view the full analysis from the report here: AAPL Ratings Report