The Breakdown

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Apple misses on earnings, but just wait for the iPhone 5

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Is it a lull? That's the easiest way to read Apple's not-unexpected fiscal third-quarter earnings miss, which was announced after markets closed today. For the record, profits were actually up year-over-year — by over a billion dollars — but Wall Street wanted more for one of the most expensive stocks on the entire stock market. Analysts were looking for $10.37 per share, but they got more than a buck less: $9.32 per share.

AAPL was duly pummeled in after-hours trading, dropping by more than 5 percent.

Blame for this just appalling performance (kidding, obviously) goes to some bumpy issues with various products, but really falls squarely in the impending launch of the iPhone 5. Apple is selling more iPads — 17 million in its fiscal Q3 — but the iPhone still accounts for the lion's share of Apple's profits. Consumers eagerly await the iPhone 5, which is technically the sixth generation of the smartphone. The consensus view is that this anticipation, this delayed gratification, is cutting into iPhone 4S sales, which while nothing to sneeze at didn't enable Apple to achieve enough growth to clear that $10.37/share hurdle.

But if you want to get worried about something in Cupertino, look to Apple's gross profit margin, which while rising modestly to 42.8 percent from 41.7 percent in last year's third quarter still came in under 45 percent, a benchmark that it has been very nearly at or over for the past two quarters. (For the record, Apple gross margin has been riding above 30 percent — an incredible level for a company that's primarily in the hardware business — since 2006.)

Apple has shown an astonishing ability to grow for a mature technology company, and given the a clear majority of its profits — 62 percent in the third quarter — are coming from markets outside the U.S., there's likely quite a bit more growth in the company's future. 

But what about fat margins to go with that growth?

Apple's elevated valuation is based on the massive spread between what it costs the company to make its most profitable product, the iPhone, and what:

•its suppliers in Asia are willing to accept in terms of cutting their margins to keep Apple's business and

•wireless carriers are willing to provide as a subsidy to carry Apple's highly desirable devices.

In both cases, that spread is very, very wide. Presto! Apple prints money and the stock price goes up, up, up. As long as the margins remain fat.

This of course means that Apple must continue to sell iPhones in substantial numbers. All good, but Apple also needs to be able to defend itself against new smartphone competitors. And lately, it's been drawing criticism for simply improving on the iPhone rather than truly innovating. 

Don't be distracted by iPad sales, either. iPads are less profitable than iPhones, as well as Apple's laptops. 

That all said, Apple has miles to go before its gross margins retreat to levels that looked pretty good six years ago. It will almost certainly recover any losses related to this quarter's earnings miss when it sells a bajillion iPhone 5s when they hit the market later this year.

Take these wobbles into account. But it's far from time to freak out on Apple just yet.

Follow Matthew DeBord and the DeBord Report on Twitter. And ask Matt questions at Quora.

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