It’s too soon to be doubting Apple

April 25, 2012

By Robert Cyran

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

It’s too soon to be doubting Apple. Fears over a slowing U.S. smartphone market and chip problems sent investors scurrying in April, when the company’s shares tumbled by over 10 percent. But the iPad maker smashed expectations yet again, almost doubling profit in the latest quarter. The trends powering Apple – China, rising margins and the halo effect – still have legs.

Two events drove the recent selloff. First, supplier Qualcomm warned it was having problems producing enough of its most advanced chips. Second, sales of iPhones at Verizon Wireless and AT&T were less than analysts had been expecting. That led to the idea the U.S. market for advanced cellphones was inching to maturation, a development that could lead to operators slashing the rich subsidies that benefit Apple.

The panic that lopped off nearly $80 billion from Apple’s market value, before a 7 percent recovery after the market closed on Tuesday, seemed overblown from the start. It doesn’t use Qualcomm chips yet. It may put them in the next iPhone, but that means there are still several months to fix the shortage. Moreover, Apple’s size and importance mean it is first in line for production. As for smartphones, it’s probably too early to worry about subsidies. An operator that can’t offer a competitively priced iPhone will bleed customers.

More importantly, Apple’s results show very little has changed about its growth trajectory. Demand is rocketing in China, where iPhone sales grew five-fold. More corporate users are trying out Apple’s gadgets. IPhone and iPad users are still converting into Mac users. Computer sales grew 7 percent, faster than the market as a whole. Gross margin is rising – now at 47 percent – an indication of Apple’s astonishing pricing power. As a result, the company generated another $14 billion in cash in the quarter, almost as much as it promised to return to shareholders this year.

Chief Executive Tim Cook seems to have settled into Apple’s sandbagging habit, saying the past quarter was extraordinary, but the current one could be tougher. Hard times will eventually descend on Apple’s 1 Infinite Loop headquarters, but there’s little reason to suspect it will be any time soon. With the shares still trading at a mere 13.5 times estimated earnings, investors should keep the faith.

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