Wall Street Beat: Despite Apple's fall, Microsoft profit drop, tech sales do well

Generally strong vendor reports help boost markets to levels not seen since before the Great Recession

Despite Microsoft's quarterly profit decline and Apple's fall Friday from its position as the world's most highly valued company, this week's wave of earnings reports was strong, boosting markets to highs not seen since before the recession.

There are big questions surrounding Apple and Microsoft, but their sales rose year over year in the last calendar quarter of 2012, and earnings reports this week from IBM, SAP and Google were solid.

Apple shares declined about 10 percent Thursday after the company reported fourth-quarter 2012 sales and issued guidance that fell short of high expectations. As a result, Exxon Mobil Friday reclaimed at least briefly its position as the world's most valued company in terms of market capitalization (number of shares outstanding multiplied by the value of those shares). In midday trading Friday, Exxon had a US$417.59 billion market cap; Apple's was $412.36 billion.

Apple on Wednesday reported revenue of $54.5 billion for the quarter ended Dec. 29, up from $46.3 billion a year earlier. However, profit was flat year over year at $13.1 billion, as earnings from the Mac and iPod lines declined.

The company gave revenue guidance in a range of $41 billion to $43 billion, below the $45.9 billion analysts were expecting for the current quarter.

The company appears to be falling victim to the law of big numbers: The bigger a company gets, the harder it is to maintain the sort of percentage increases for growth it used to achieve as a smaller company. Investors are getting spooked by the prospects of a slowdown in growth for the company.

Cooler heads are pointing out, however, that the company still has strong products likely to come out later this year.

"We maintain our belief Apple has a strong product pipeline that should result in reaccelerating Y/Y earnings growth during the June quarter," wrote Canaccord Genuity analyst T. Michael Walkley in a research note. "We reiterate our BUY rating, but lower our price target to $650."

Microsoft, reporting quarterly earnings Thursday, stumbled on profit. Net income shrunk to $6.38 billion from $6.62 billion a year earlier. The last few months were important for Microsoft, as they were the first time the company reported financial results that included Windows 8 -- the touchscreen-oriented OS that represents a big effort to make headway in the post-PC era.

Despite the earnings decline, the company's Windows division generated sales of $5.88 billion, up 24 percent year on year. Even taking out the so-called deferred sales for software ordered earlier but officially accounted for during the quarter, revenue for the unit was up 11 percent.

Overall revenue for Microsoft increased 2.7 percent to $21.46 billion in the quarter. Microsoft fell victim to the law of big numbers more than a decade ago. Now the question is whether its round of upgrades geared for the tablet and mobile era can compete with products from Apple and vendors betting on the Android mobile OS.

Meanwhile, IBM's fourth-quarter net income increased 6.3 percent to $5.83 billion, though total revenue dipped about 1 percent to $29.3 billion.

The company's software products and sales in developing markets returned to growth, though its services business declined. Investors appeared to like the company's report though, sending shares up this week. IBM's guidance of 2013 helped. The company forecast earnings per share of at least $15.53, an increase of 8 percent.

For its part, Google wowed investors by reporting that quarterly revenue, excluding fees to sites that run its ads, hit $14.42 billion, up from $10.6 billion a year earlier. Net income including the loss from the Motorola Home business division was $2.89 billion compared to $2.71 billion. Google shares jumped from $702.81 before the report to close at $754.21 Thursday, though they slipped by a few pennies in Friday afternoon trading.

On the software front, SAP sales were a harbinger of good things to come this year. SAP said revenue in the fourth quarter grew by 12 percent to ¬5 billion (US$6.6 billion), helped by strong growth in the market for its cloud applications, its HANA in-memory database and mobile applications. SAP's operating profit was, however, down by 5 percent in the fourth quarter to ¬1.6 billion, mainly because of expenses on share-based compensation and acquisition-related charges.

But SAP forecast software and software-related service revenue growth of 11 percent to 13 percent in constant currency terms for the year, excluding one-time items. SAP shares rose steadily this week.

On the company's conference call, SAP co-CEO Bill McDermott said that while many companies were holding off purchases while waiting to see what would happen to the so-called U.S. "fiscal cliff," fears of an austerity-induced recession seem to be fading. The fiscal cliff was a series of budget cuts set to go into effect if the U.S. Congress had not reached at least a partial deal on taxes and spending.

"We see early evidence already, now that we're through the fiscal cliff, that [business has] loosened up and returned to a normal state again, which is quite encouraging," McDermott said.

There was also plenty of good news in the consumer electronics market this week:

--Samsung's Galaxy S3 and Note 2 handsets helped increase quarterly net profit by 75 percent to 7 trillion won (US$ 6.56 billion) from 4 trillion won a year ago. Revenue was 56 trillion won.

--Nokia reported fourth-quarter sales of ¬8.04 billion (US$10.71 billion), down 20 percent year on year, resulting in profit of ¬202 million, compared to a net loss of ¬1.07 billion a year earlier.

All major U.S. exchanges and indexes rose Friday, after the S&P 500 broke 1,500 for the first time since December 2007. Though a drop in claims for unemployment benefits helped, strong prospects for tech were also credited with the general optimism. The Nasdaq computer index rose 2.2 points Friday to close at 1559.61, despite Apple's declining share price.