Apple, Inc. (NASDAQ: AAPL) had what some were calling a “horrible” quarter, where they gave poor guidance and revenues were light. Analysts have even asked if their model was broken.
In our opinion, no. The company made a profit of $13.1 billion, which is the second highest profit by an American company ever. The company sold 28% more iPhones and 40% more iPads. We have to ask, how is this considered broken?
We expected there would come a time when Apple would get to a point where growth may slow down. However, growth is still projected at more than 17%. One complaint currently we can agree with is the lack of innovation. CEO Tim Cook’s trend is to refresh. Recently, the company has not released a product that didn’t already exist. When they didn’t have competition, they could do that. What hurt was the lack of excitement for the iPhone 5. Consumers opted for the cheaper 4S model, which has about the same features, at $200 less.
We believe that growth in China could take Apple to a new level. We believe the potential for growth is there.
In the recent earnings call, Tim Cook said the pipeline was full, but didn’t say full with what. With such vague guidance, the market reacted accordingly, with a sharp sell off. Still, in contrast, Microsoft, Corp. (NASDAQ: MSFT) sells for a P/E of 10.8, with a projected growth of 9.5%. Apple sells for a P/E of 10.2, with a projected growth of 17.8%. Based on that alone, we choose Apple.
Netflix, Inc. (NASDAQ: NFLX) saw a considerable bounce this week on surprise earnings news. The company gained 2 million subscribers in the fourth quarter, which is a sticky, recurring revenue source at $8 per month, per subscriber. The service has more than 27 million U. S. subscribers.
We think Netflix is still a viable business because of the content. Netflix is targeting older shows unavailable elsewhere and exploring original programming. However, the cost of content may be a detriment to Netflix. As they license more content from providers, it could cause a decline in television viewership. In our opinion, providers will not let that happen, and could likely increase the cost of content to Netflix, which could eat away at their profits. Additionally, with competition from Redbox, Amazon.com, Inc. (NASDAQ: AMZN), Hulu and iTunes, the space is crowded.
The stock is still down considerably from July 2011, when the company initiated their first price increase. We do not believe, they can continue to exist on $8 a month. For example, in the second quarter 2012, their return on equity went down 75%. In the third quarter, it went down 88%, and in fourth quarter return on equity decreased 95%. We think, the company cannot be profitable long-term, and is one to avoid.
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