Apple’s after-market earnings call did not paint a very rosy picture, and more disappointment is expected. How could its stock rise by 5% in after-market trading then?
Apple’s shrinking revenues are no secret, both among analysts and even among many individual investors, who generally do not watch such things very closely.
They may be aware of the trend of stocks going up when quarterly reports disappoint or paint a dimmer picture than we thought, and such things are well documented in the financial media and even in mainstream news sources.
Therefore, many people may think that it is strange that Apple could both see their revenue decline and also forecast that revenues are expected to keep declining, only to see the stock go up in subsequent trading.
While this result was seen in after-hours trading, and the real story is told during the regular session, after-market trading is usually a pretty good indicator of market sentiment. As is the custom, Apple’s results were announced after the bell, and for those who are looking to get a good preview of how the market as a whole will view these results, after-market trading is actually a pretty good guide.
The first key to understanding such things properly is that market reaction is driven not by the raw numbers but by deviations from expectations. Apple’s revenue numbers were already pre-released earlier this month, so this part did not come with any real surprise at all, and the market has already priced in this news so to speak.
Bad News that We Already Know About is Always Already Priced in
We could also say that they have priced in Apple’s declining revenues as far as what we know about this, as well as predictions that this will continue. Apple stock has taken a real beating lately. Tuesday’s close had Apple off $71 a share from where it was just a few months ago, which cashes out to a 31% decline since its October peak.
Declining business performance has therefore already shown its ugly head in Apple stock trading, and this also includes the fact that there are still some serious concerns that this could keep getting worse. Apple is still only about 4% off its recent bottom it put in on December 31, and the buying love that the market in general has seen over the last month or so hasn’t done that much for Apple’s stock.
Apple provided us its insight into where things may be heading in Q1 of 2019, and this news is said to be worse than people expected. Apple’s revenue for Q4 dropped from the company’s initial forecast, and they are now setting the bar lower with their prediction for the current quarter.
This certainly doesn’t look very encouraging at all, and especially not bullish, and stocks generally hate news worse than it expects and will punish stock prices for it typically.
When we look at Apple’s announced earnings though, it actually increased by a penny a share over the consensus from analysts, achieving $4.18 per share compared to the $4.17 that was expected.
Profit is What Really Matters
It’s not that declining revenues aren’t a concern, but it’s not so much how much a company takes in, but how much they keep. Earnings predictions therefore matter more, and when a company can meet these expectations, we wouldn’t expect that to be seen as a reason to sell the stock, and especially not be willing to dump it for a lower price.
This still does not explain how Apple could be up so significantly after an earnings call like this, but we need to realize that sometimes the consensus view by analysts doesn’t solely guide the market.
Apple closed Tuesday down a percentage point, which is a pretty meaningful decline, on a day where the market was up overall. It wasn’t just the earnings announcement that drove things up though, as interestingly, we saw the stock jump over 3% after the bell even before the earnings call.
The call just added to this momentum, although that’s a good sign as well, but this does tell us that there was some money that was already willing to bet on this before the word hit the street, which is also encouraging.
The bottom line with all of this is that the market overall’s expectations of things were worse than this and they are buoyed by this otherwise not very positive report. It really is about where results measure up to beliefs, and the beliefs about Apple seem to have been worse than we may have thought, at least prior to the announcement.
There’s also the fact that some may see Apple as a pretty desirable stock right now, and may be way overpriced at $225 a share but looks pretty tempting around the $155 per share range. Apple has proven to be an extraordinary company over the years, and many people still have enough faith in it, in spite of its relative struggles, to want to have it in their portfolios and take a shot at the potentially better than market returns over the next while.
The real story is always told by the market, and whatever we may have thought will happen, our beliefs, always takes a back seat to what actually does happen, the facts. The facts are speaking about this earnings report and they are seeing it as positive thus far anyway.
The why therefore doesn’t really matter much, if at all.