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29 October 2013 By Robert Cyran

Apple’s simple story is complicated by the status quo. Fourth-quarter results released on Oct. 28 contain plenty of encouraging elements. It’s just that each comes with an asterisk.

The pressure on margins from rivals like Samsung is evident. While Apple’s top line grew 4 percent from a year ago, the bottom line shrank by 9 percent. That explains why its shares are trading at 12 times estimated earnings for the next fiscal year. Skeptics who think Apple’s days of super-profitability are behind it will find enough in the latest figures to satisfy them.

The growth dilemma is at least partly being solved by the sale of more gadgets. That includes Greater China, where revenue was up by 24 percent from the third quarter even though a deal with China Mobile remains elusive.

After falling lately, Apple’s gross margin has stabilized at 37 percent. Improved iPhones and iPads make a difference, but it still takes time for the company to figure out how to maximize profitability for a new product. A new accounting policy also isn’t helping. The deferral of software revenue confused investors, who initially thought Apple was guiding to lower margins when it actually expects them to inch higher.

The way to jumpstart earnings is with something altogether new. Cook said Apple would soon compete in a category in which it currently doesn’t. This iCarrot has been dangled before, however. The timing remains uncertain and there’s no assurance that whenever the new thingamajig arrives that it will be a hit.

The more immediate way to goose the shares would be to return more of its $150 billion to investors. Cook said the board is reviewing capital allocation, which probably means another increased share buyback plan is in the works. Here there’s a hitch, too, though. Apple is already giving back essentially all the cash it generates in the United States. Unless profit ramps up or tax laws change, it’ll have to borrow even more – as billionaire Carl Icahn has urged – to avoid the added cost of repatriating funds from overseas. 

Put all the issues together and the Apple investment case is complex. At this point, it’s easier to use the products than to craft a clear financial thesis about them. 


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