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Why was Apple Inc’s stock punished? It’s their own fault for being so good

Joe Chidley: The bigger problem for Apple might simply be the huge expectations investors put on it.

Here\’s a wee quiz: a business releases quarterly earnings that handily beat analyst estimates, reporting healthy margins, double-digit percentage year-over-year profit growth, along with a 35-per-cent increase in sales of its main product. What goes on to the stock price?

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Before you answer, consider that we\’re not referring to some flavour du jour startup. The firm under consideration is a world-beater in its sector, with a history of strong profit growth, a rabidly loyal global customer base, and a knack for knocking off competitors, even people who once seemed unbeatable.

You might expect this company\’s stock to obtain a nice little surge. However, if the company under consideration is Apple Inc., and the quarter we\’re referring to is the Cupertino, Calif.-based tech superpower\’s fiscal Q3, you\’d be wrong. Dead wrong.

Apple\’s third-quarter earnings, released Tuesday after markets closed, were strong by any measure, save one: investors\’ very high expectations.

Within minutes from the release, Apple shares were down eight per cent in after-hours trading, shaving US$50 billion from the market cap from the world\’s best company, although they bounced back just a little on Wednesday from that beating.

Good luck finding much reason behind the selloff in the top-line numbers. The company reported year-over-year revenue grew 33 percent to nearly US$50 billion; gross margin – a vital metric since it gives a sign of production costs versus revenue – arrived at 39.7 percent; and profit rose 39 percent to US$10.7 billion or US$1.85 per share.

All those figures beat analysts’ average estimates, but those estimates don\’t tell the whole story.

Investors usually have their own way of seeing things, therefore, the so-called \”whisper number,\” the sum of expectations of the broader base.

Of course, this really is impossible to quantify, but some try. Based on crowdsourcing site WhisperNumber.com’s polling, the whisper number prior to Apple\’s Q3 earnings per share was US$1.83, just a little above the US$1.81 analysts expected. Quite simply, the company even beat informal estimates.

So why was Apple punished for such great performance?

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Well, there were some nodules of disappointment in the earnings release: iPhone unit sales arrived at 47.4 million, less than some estimates and Apple\’s forward guidance for that current quarter called for revenue of a maximum of US$51 billion, short of analyst estimates by in regards to a hundred million dollars.

Concerns over a slowing economy and stock exchange weakness in China – an essential growth marketplace for Apple – also weighed on sentiment. And a reliance on the handset business certainly spooks some observers, who\’d want to see better product diversification, and were disappointed that recent results for the buzzy iWatch weren\’t set off.

Yet even taking into consideration all those factors, it\’s hard to see a fundamentals-based rationale for that stock\’s post-results plunge. Apple made more income per unit sold in the quarter, and also worked down its inventory.

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