Today: Apple (AAPL) shares drop 12 percent on growth concerns, while Netflix (NFLX) jumps 42 percent -- but may soon face its own growth concerns. Also, Microsoft earnings drop, while Juniper beats expectations.
Apple falls back to earth, drops 12 percent
The burden of great expectations weighed heavily on Apple on Thursday, as the Cupertino tech giant lost more than $50 billion in valuation as its shares tumbled 12.35 percent, or $63.51, a day after reporting disappointing earnings. Apple closed at $450.50, its lowest point in almost a year.
For a typical company, Apple's report would have been cause for celebration: Record profits over the holiday quarter, and significant growth in sales of its key products -- iPhones and iPads. But Apple is no typical company, and the numbers did not meet Wall Street's sky-high expectations. More troublesome to investors, Apple warned it expects slower growth in future revenue, a sign that its five-year run of spectacular growth may be coming to an end.
Realistically, Apple's amazing run -- in which it posted 55 pecent annual growth for three years in a row and became the most valuable company in the world (a title it may soon lose) -- is not sustainable in the long run. One analyst calculated that if Apple continued growing for the next five years at the rate it did over the past five years, its revenue would exceed the gross domestic product of Australia. As the Merc's Troy Wolverton notes, Apple's growth has slowed to 27 percent over the past three quarters, and it expects the next quarter's growth to drop to 10 percent or less.
According to some experts, Apple became a victim of its own success, driven to a point where it just couldn't win. "Apple has got to the point where all news is bad news," financial analyst Benedict Evans wrote in a blog post. "This is a catch 22: high numbers mean saturation (bad), and low numbers mean slowing growth (bad)."
That screeching of the brakes led 18 brokerages to cut their price targets for Apple on Thursday, with the average target dropping $132, to $612 a share. "People are concerned about how quickly sales are falling off after the initial product launches and whether the company can deliver new and interesting products to reignite growth," BTIG analyst Walter Piecyk told Bloomberg News.
More realistic expectations may end up benefitting Apple in the longer term. "We believe a capitulation process is underway -- and while painful -- it is healthy since the loftiest expectations should be reined in quite a bit," Barclays analyst Ben Reitzes said in a research note, according to All Things D. "This spring, Apple should be readying a bevy of new products and services -- and when the builds for these products become known -- shares may act a lot better."
"Even if its days of hypergrowth are over, Apple remains an astonishingly profitable company," Bloomberg Businessweek wrote. RBC Capital analyst Amit Daryanani concurred. "We view the results as a sign that AAPL is executing well as they shift to a more normal growth company," he wrote in a note.
And even if Apple has to settle with being just a "normal growth company," at least it can sleep soundly knowing it's still an incredibly profitable one.
Netflix has its best day ever, hits 18-month high
Netflix also announced quarterly earnings Wednesday, but unlike Apple, little was expected of the Los Gatos video-on-demand company. But after posting stunning profit gains -- up 13 cents a share, almost completely opposite the expected 13-cents a share losses -- shares soared more than 42 percent Thursday, the best day in Netflix's history. Shares closed at $146.86, up $43.60. The stock has more than doubled since September, and is now trading at an 18-month high.
On Wednesday, Netflix reported a bigger than expected increase in subscribers, and CEO Reed Hastings credited gains from streaming subscriptions as consumers got tablets and Internet-connected TVs over the holidays. The gains came despite recent costly deals with Disney and other studios to exclusively stream TV and film content.
"Momentum is clearly on Netflix's side now and the stock could continue to ride sentiment around subscriber growth and content deals," Macquarie analyst Tim Nollen told Reuters. Macquarie was among eight firms that upgraded Netflix's rating or raised its target price Thursday.
Still, the future is murky for Netflix, which has a history of volatile stock swings. Netflix's current stock price is still just half what it was in the summer of 2011, when it announced its ill-fated Quikster spinoff that ended up costing the company nearly a million subscribers. Experts warn these recent gains may be only short term, and rising costs for content and slower subscriber growth could hamper future earnings. B. Riley & Co. analyst Eric Wold told Barrons he sees Netflix shares falling to $90 in 2013, saying "competitive pressures will come into play this year."
"Netflix can only improve the typical viewing experience for next year by increasing its content spending, negatively impacting profitability further," Wedbush Securities analyst Michael Pachter wrote in a note Thursday. "I think the company is genuinely mistaken in how it thinks it is going to manage content costs," Pachter said, according to the Associated Press. "This is truly a house of cards and it's going to come crashing down this year."
Nasdaq dips, as do Microsoft earnings
Apple's drop hurt the tech-heavy Nasdaq, which declined 23.39, or 0.74 percent Thursday, while the Dow Jones industrial average and Standard & Poor's 500 remained essentially flat.
Microsoft shares dipped more than 2 percent in after-hours trading after announcing that earnings dropped 4 percent in the past quarter. The Redmond, Wash., company had hoped to get a bigger boost from its new Windows 8 operating system.
"Windows 8 continues to have an uphill battle in convincing investors this is going to be the key to the growth story for Microsoft," Daniel Ives, an analyst at FBR Capital Markets, told Reuters. "It continues to be a major prove-me product cycle."
While revenue from the company's Windows division grew 24 percent year-over-year, the numbers were still sluggish; in previous years, the introduction of Windows 7 sales boosted quarterly revenue 76 percent, and Vista created a 65 percent bump when it debuted, according to CNNMoney. Sales of Windows Phone 8 were also disappointing, dropping 11 percent from last year, and sales of its popular but aging Xbox gaming console declined as well.
Closer to home, Sunnyvale's Juniper Networks beat analysts' expectations, posting earnings of 28 cents a share on revenue of $1.14 billion, and the company announced its current earnings guidance were on track. Shares rose slightly in after-hours trading.
Silicon Valley tech stocks
Down: Apple, Intel
The tech-heavy Nasdaq composite index: Down 23.29 , or 0.74 percent, to 3,130.38.
The blue chip Dow Jones industrial average: Up 46 or 0.33 percent, to 13.825.33.
And the widely watched Standard & Poor's 500 index: Up 0.01 or 0 percent, to 1,494.82.
Check in weekday afternoons for the 60-Second Business Break, a summary of news from Mercury News staff writers, The Associated Press, Bloomberg News and other wire services.