Why Apple Earnings Surprise May Not Be Enough

How will Apple cope with the threat of a No. 2 that is steadily making gains?

In this photo from Oct. 20, 2012, people line up to enter a newly opened Apple Store in Wangfujing shopping district in Beijing, China.
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Most importantly, it moved Samsung upstream in the product world. Already, the Korean company had a lead in the number of phones sold in the global market, but mostly with cheaper phones. The Note, and improvements to its Galaxy flagship, have shifted perceptions, as have its advertising spots, cleverly devised to show it as hip and outsider-ish. At the same time, Samsung's manufacturing chops give it the luxury of spinning out new products at a fast and furious pace. By producing lots of different products, customers can decide the future, choosing from an array of phones that look funny but surely think differently.

Samsung has category-leading sales for a vast array of products, but its market capitalization values it at less than half of Apple's total. Profits are growing, and topped $7 billion in the last quarter. That's well below $13 billion for Apple, but the consensus view is that Apple will report an earnings decline of 3 percent this week, Thomson Reuters estimates, though some analysts predict double-digit gains.

The lesson for investors. A strong earnings report could well give a fresh lift to the beaten-down Apple, but if it recovers, its share price may still be capped by The Law of Big Numbers, which basically says growth slows once you hit a market value that investors can no longer afford to bid higher. The stock is likely to remain volatile as it makes a transition from a growth stock to more of a value stock, says Cassese.

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As Apple reached its record-high stock price of just over $700 per share for a total of just over $650 billion in market cap, the ascent to the record valuations may have led to a change of perceptions. Some took it as a signal that it would become the first $1 trillion company. But the market as a whole decided to start taking money out of the stock because its growth potential was shrinking.

Analysts have come up with many reasons for the four-month slide to $500. Mostly, their rationales ignore the size of the elephant in the living room. While its price-to-earnings ratio remains modest at about 11 times earnings, half of the 20 of the Standard & Poor's 500 (SPX), investors still wonder where Apple's next massive growth will come from to justify more gains in the stock price. Its earnings in the past have been lights-out strong, to be sure, and certainly account for Apple's present value. But as always, no matter how stellar the company, past performance is no guarantee of future results.