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Bar set high for Apple and Microsoft as they trade near multi year highs.
00:00, 21 July 2014
The last time Apple shares were trading at these sorts of levels below $100 was all the way back in 2009, so last month’s stock consolidation was certainly welcome news for those investors who found themselves priced out from buying the stock in the rally that we saw from 2009, to when we peaked in 2012 at $705. Since those peaks we saw a sharp decline in the share price, after the botched Apple Maps launch, which saw the shares find a base in 2013. When the recent stock consolidation was announced in April this year the shares enjoyed a sharp rise after earnings beat expectations as the sales of the new iPhone 5’s started to gain traction. The highlights in Q2 were 43.7m iPhones sold, 16.3m iPads and 4.1m Macs, with quarterly revenue at $45.6bn and quarterly net profit of $10.2bn. With Q3 earnings due on the 22nd July attention will inevitably be focussed on the these headline numbers once again, particularly given the very disappointing update earlier this month from its big rival Samsung. Samsung announced earlier this month that it expected to see its third consecutive decline in quarterly profit, as it struggles to compete with cheaper devices in the Chinese market, losing market share in the process. The company did cite the strength of the Korean won as a contributory factor, but there does appear to be a significant impact to its market share, given that it appears to have a large amount of unsold inventory in Europe and China. Samsung’s problems could also spell bad news for Apple in the wake of its recent tie up with China Mobile to sell iPhones which did raise expectations of a significant increase in revenue growth in the rest of 2014, due to the sheer size of China Mobile’s user base. These concerns help explain the guidance for Q3 which estimates a fall in revenues to between $36bn and $38bn, and a fall in net profits to $7.4bn. In terms of share price performance the most recent quarter has been a much better quarter than the previous one, but be under no illusions that the forthcoming quarter will be just as much about what has happened in the last three months but also about what the company has in its pipeline, after the announcement in May of the “best product pipeline in 25 years” by senior Apple VP Eddy Cue. Talk about ramping up expectations, particularly with the share price closing in on its adjusted all-time highs of $100.72. A failure to deliver on these expectations could well see the share price drop sharply, particularly if details of the pipeline fail to emerge or excite. Rumours have abounded since then of an iPhone 6, made of sapphire glass with a bigger screen to compete with the latest Samsung Galaxy phone. Any redesign of the iPad is likely to be minimal given recent upgrades but we could still get some tweaks with iOS8. We could get some news about progress on wearable technology, like an iWatch, while AppleTV is also well overdue some form of revamp. Recent high profile acquisitions have also seen Apple in the spotlight, particularly the purchase of Beats for $3bn, which still needs to be given the green light by the European Commission, as it looks to improve its streaming services. Microsoft. It’s been nearly six months since new CEO Satya Nadella got his feet under the desk at Microsoft and this week’s latest trading update will be akin to the new boy’s first school report at the end of the first term. Nadella’s elevation to CEO has been part of a long term strategy to reposition and restructure the software giant away from its old legacy markets and into the mobile and cloud computing space. In the second quarter just after Christmas, the company beat expectations through increased Xbox One and Office sales, but its Surface tablet device has struggled to gain traction, as users struggle to get to grips with the new look of Windows 8. As we come to the end of Microsoft’s fiscal year the latest Q4 earnings announcement should give us some early indications of how far along we are with Nadella’s new vision of a “one Windows” model for the company. Nadella’s determination to implement a new cloud based computing model has seen Microsoft really push its new one drive cloud storage service , with a free 15GB for everyone, with a One Account, while at the same giving 1TB for Microsoft Office 365 users. With the launch of the new iPad apps for Word, Excel and Powerpoint in the iTunes store there appears to be have been a realisation that a lot of Microsoft customers also use an Apple device and being precious about supporting Apple devices could cost Microsoft additional revenue, particularly in a world where Microsoft is no longer the only game in town. Office 365 accounts for over 60% of Microsoft operating profit and anything that can make this much stickier, as well as potentially increase it, needs to be done. While the new apps are free to download you need an Office 365 subscription to get the most out of them and this latest update should give us some initial indications as to how successful the initial roll-out of these new apps have been. We’ll also find out whether or not the decision to end support for Windows XP on April 8th has seen a pick-up in new PC sales this quarter, or whether this forced decision has seen people move over to Apple Macs. Microsoft did soften this blow by cutting the price of Windows 8 by 70%, in an attempt to drive up the adoption rates for Windows 8, which still lag behind Windows 7. The company has also taken the fight to Sony in the gaming console market by cutting the price of its Xbox One console earlier this year in an attempt to drive up its market share, given that the PS4 is estimated to be outselling it by around two to one. As part of this new strategy Microsoft also included a new software bundle including the massively hyped TitanFall and if early reviews are any guide it appears to have had rather mixed reviews. As Microsoft continues its restructuring efforts we could well also get more details on the planned job cuts across its recently acquired Nokia handset unit, which are said to be in the region of thousands as the company looks to streamline areas of the business like marketing that overlap. The shares are currently trading at multiyear highs and above their 2007 peaks as investors bet on an end to the stagnation of the Ballmer years, in the hope that we’ll see a return to levels last seen in 2000. Estimates for Q4 are for revenue of $21.9bn and gross profits of $15.48bn. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.