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April 22, 2009

Another Blowout for Apple Supports More Upside

Apple reported another blowout quarter with revenues and gross margins far exceeding expectations and driving EPS to $1.33 vs. consensus of $1.09 and whisper numbers in the $1.15 to $1.20 range. Guidance is typically conservative and about 10% below current analyst estimates which is normal.

There is really very little to complain about. In my live Twitter commentary of the conference call I noted that the quarter was amazingly routine, especially given the economic headwinds. I see no reason the stock can’t move up toward $150 assuming the market cooperates. Positive catalysts ahead could include new products – iPhone and netbook, the return of Steve Jobs in June, and more positive earnings surprises.

I remain quite bullish on Apple but there were a few things worth pointing out on cautious side in the quarter. First, desktop ASPs fell sharply. Management attributed this to a mix shift as weakness was more evident in Creative/Professional and Education. Second, U.S. Mac market share fell. Management says that they focus on long-term trends in market share and don’t put much stock in any single quarter. Third, cash flow was less robust than usual. Management explained clearly that one-time items impacted the quarter.

Guidance is what really matters to short-term trading in Apple. I would have liked to see it stronger given that the past several years saw flattish March to June revenue and EPS. This would mean June should come closer to $8.2 and $1.33. Thus, I would have liked to see guidance closer to these numbers and above current estimates. One explanation is that Apple is not going to recognize any revenue from iPhones sold after March 17th until new software is released in July. I still expect 3Q results much closer to the March quarter.

Estimates will go up toward $6.00 for 2009. Excluding interest income the figure is around $5.75. Cash is no $33 per share and headed to upper $30s by fiscal year end. Stock is trading $90ish ex cash or 15-16 P-E. Adjusted earnings if Apple were recognizing iPhone revenue at sale instead of over two years is probably $9-10 putting the multiple at 10 times or in line with other large cap tech leaders. I think Apple deserves a premium. Looked at another way, these is a big cushion to estimates for the rest of 2009 and 2010 and 2011 from deferred revenues. That is comforting but product momentum is more important. For now, the pipeline looks good.

While the quarter was a blowout and reinforces my faith in meaningful further upside in Apple shares, I think the stock could be due for a rest after the huge move this year. I am not selling and would buy any significant pullback. A move $5 in ether direction on Thursday from the $124 after hours level as I type would not surprise me.

Posted by Steve Birenberg at April 22, 2009 05:09 PM in AAPL