Apple’s mind-blowing warning means CEO Tim Cook now has a major credibility problem

Brian Sozzi

Apple CEO Tim Cook and his management team should read the coverage of their mind-blowing warning to every investor on the planet on Apple News and then ask: “Should investors trust us right now? And, how can we regain that trust.”

No doubt January 2, 2019 will go down as one of the worst days in Apple’s history. It’s not akin to 1997 when Apple founder Steve Jobs returned to a flailing tech company that was losing billions. But still one that amounts to a complete smashing down of the reset button on how Wall Street and the average investor views Apple (AAPL).

And as tough as it is to say, given Cook’s generally strong leadership since the passing of Jobs, he and his management team bare the responsibility for the shocking warning. They failed to keep it real with investors on what they were seeing in iPhone demand data late in 2018. Simply no longer providing unit sales data wasn’t enough of a signal to investors that something was wrong, bottom line.

As a result, Apple’s stock could be “broken” until credibility is restored.

“Apple’s stock is now at a crossroads. Some investors will consider the stock broken and never reward it with a “proper” multiple, but we’ve followed the company long enough to know there is cyclicality in the market’s relationship with Apple,” cautions long-time Apple analyst Gene Munster of Loup Ventures.

A poor job done with guidance.

Apple said in a filing released after market close Wednesday that it now sees first quarter revenue of about $84 billion. It previously anticipated $89 billion to $91 billion. In the filing, Cook attributed the reduced guidance to weakness in emerging markets and in Greater China as well as supply constraints on new products. Cook also hinted strongly that Apple felt resistance from consumers to the new $1,000 plus iPhone XS line.

While Cook tried to hype strong demand in AirPods and Apple Watches, investors weren’t buying it.

Trading was halted Wednesday for Apple shares at about 4:25 p.m. ET in advance of the release of the announcement. The stock declined 8.49% to $144.51 per share when trading resumed 25 minutes later, hitting the lowest level since July 2017.

Shares dropped about 8% in early trading on Thursday.

Apple should have kept it real with investors in 2018.

But a little more than two months ago Cook and Apple Chief Financial Officer Luca Maestri were singing from a different hymn sheet. Judging by their comments on Apple’s fourth fiscal quarter earnings call on November 1, Apple was in fine standing around the globe. Interest in new iPhones was running high. Investors should ignore executives deciding to remove a key piece of guidance (iPhone unit sales) that has been key in assessing Apple’s fundamentals for years.

Some comments of interest from that November call.

Maestri Comment 1: “Third, starting with the December quarter, we will no longer be providing unit sales data for iPhone, iPad and Mac. As we have stated many times, our objective is to make great products and services that enrich people's lives, and to provide an unparalleled customer experience so that our users are highly satisfied, loyal and engaged.

As we accomplish these objectives, strong financial results follow. As demonstrated by our financial performance in recent years, the number of units sold in any 90-day period is not necessarily representative of the underlying strength of our business. Furthermore, a unit of sale is less relevant for us today than it was in the past, given the breadth of our portfolio and the wider sales price dispersion within any given product line.”

If Apple hadn’t pulled its unit guidance and kept it real by leaving it intact, investors could have gotten a truer picture of the business more than two months ago. Instead, they are gifted an unwelcome holiday surprise on the first day of trading for 2019.

Maestri Comment 2: “At the revenue level, we started from the fact that we are very, very excited about the lineup of products and services that we have getting into the holiday season. It's the strongest lineup that we've ever had. And our guidance range, by the way, represents a new all-time quarterly revenue record.”

Apparently, not that strong given the almost $7 billion haircut to revenue guidance.

Maestri Comment 3: “The third point that I think it's important to keep in mind, and Tim has talked about this, we are launching, in the last six weeks, we've launched an unprecedented number of new products. They're all ramping right now. The ramps are going fairly well, but obviously we have some uncertainty around supply/demand balance for some of these products.”

Not that well it seems. Cook devoted a good chunk of his letter on Wednesday to the impact to sales from supply constraints for the Apple Watch 4, iPad Pro, AirPods and Macbook Pro.

“And then finally, the last point that we've taken into account is what Tim's talked about in terms of some level of uncertainty at the macroeconomic level in some emerging markets where clearly consumer confidence is not as high as it was 12 months ago.”

Cook cited “macroeconomic” issues holding back results three times in his new letter. That isn’t exactly on par with Maestri’s “some level of uncertainty” expressed in November.

Tim Cook: “To give you a perspective in of some detail, our business in India in Q4 was flat. Obviously, we would like to see that be a huge growth. Brazil was down somewhat compared to the previous year. And so I think, or at least the way that I see these, is each one of the emerging markets has a bit of a different story, and I don't see it as some sort of issue that is common between those for the most part.

In relation to China specifically, I would not put China in that category. Our business in China was very strong last quarter. We grew 16%, which we're very happy with. iPhone in particular was very strong, very strong double-digit growth there. Our other products category was also stronger, in fact, a bit stronger than even the overall company number.”

Nothing here from Cook indicates China would be mostly blamed as the culprit for a nasty financial warning some two months later.

Apple CEO Tim Cook, too optimistic?

The bottom line

Unsurprisingly, most Wall Street analysts remain upbeat on Apple in the wake of the warning. Price targets have been slashed by most firms, but analysts continue to think Apple is unrivaled in tech and that positioning will bring massive future earnings. Canaccord Genuity analyst Michael Walkley captures the mood of most of his peers right now rather well.

“With a mature smartphone market, we believe Apple has locked up strong share of the premium tier market and will continue to dominate high-end smartphones sales and capture the vast majority of smartphone profits for the next several years. While the smartphone market is slowing to low single digits annual growth, Apple’s dominant profits of the world’s largest consumer electronics market is likely to continue,” Walkley writes.

But the bottom line is that Cook & Co. temporarily must be viewed skeptically by Apple’s entire investor base. Stock analysts’s musings be damned. Cook & Co. must lay it all out on the table when the company officially reports earnings in coming weeks.

More transparency, not less on business performance. A more measured tone, not another hype job as is typical in Silicon Valley. Clear insight into when completely new products will debut and what they could be (augmented reality, TV, streaming service). Specific details on efforts being taken to jump start the China business.

Says Munster, “We expect the company to focus on Tim Cook’s promise to “focus really deeply on the things we can control” and help investors better understand the underlying strength of Apple’s business. It will probably take a new product category, large M&A (to restart growth narrative), a more aggressive buyback, or providing greater insights into their business, particularly services, to persuade investors to think differently about Apple’s multiple.”

If Cook & Co. don’t do these things, their new credibility problem will likely rage on for most of 2019. That would be unfortunate given their level of expertise and Apple’s standing in the world.

Emily McCormick contributed to this story

Brian Sozzi is an editor-at-large at Yahoo Finance. Follow him on Twitter @BrianSozzi

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