April 26, 2012
Another Apple Blowout
Apple reported another quarter of stunning results. Not quite as good as the December quarter but still something to behold. Revenues of $39.2 billion exceeded consensus by about $5 billion. EPS of $12.30 compared to a consensus estimate of $10.04. These results also exceeded the "whisper" numbers which were 10-15% above consensus.
Apple's great numbers came against a backdrop of sudden worries about the stock and the business outlook. Those worries were likely exacerbated by the 50% up move in the shares into the early April peak. Including the day of the report Apple had fallen 12% in ten days with only one up day in the last ten.
Concern arose around the number of iPhones sold due to slightly worse than expected iPhone sales at Verizon and AT&T which reported before Apple (as they do every quarter). An equal worry was whether AT&T and Verizon would subsidize iPhone purchases to a lesser amount and tighten upgrade policies. Apple gets over $600 per iPhone from the carriers which sell them to consumers for $200 along with a 2 year contract guaranteeing 24 months of expensive monthly data plans. Verizon and AT&T have tightened upgrade policies which could slow demand for iPhones as many users upgrade every new generation. Any reduction in the subsidy could further reduce iPhone sales by raising the price to consumers.
At least for this quarter, these issues proved meaningless. iPhone sales soared past estimates driven by Chinese and other Asian demand. Apple's growth story is increasingly overseas, something analysts over focused on the US had forgotten. iPad demand met expectations, while Macs were a little light. The mix shift toward iPhones, falling commodity costs, and some one-time benefits sent gross margin surging to all-time record.
The shares bounced back strongly after the report, regaining about 2/3rd's of the recent losses. I think this quarter justifies Apple trading as high as $750-800 later this year based on 12 times calendar 2012 EPS of about $50 plus what will be around $140 in cash by year end. However, after the big run in the shares this year and with no obvious new catalyst until the fall launch of iPhone 5 (and possibly a smaller iPad and TV), I think the shares could stall in $600-$640 range for awhile. The Street is going to be concerned about slowing earnings momentum and a pause in iPhone sales ahead of iPhone 5 similar to early last fall ahead of the 4s launch. I suspect iPads will beat expectations over the next few quarters driven by education demand and broader geographic distribution. A refresh of the Mac line early this summer also could provide some upside.
The bottom line is the Apple story is not over yet although the stock could stall for a few months or even until fall. Let's not forget how far it has come this year. I long thought the market was significantly undervaluing Apple. The move this year leaves the stock just normally undervalued. This situation requires fresh catalysts. I expect them later this year.
Disclosure: Apple is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg's personal accounts. Northlake is an Illinois registered investment advisor. Filings can be found at www.sec.gov. Apple is a net long position in the Entermedia Funds. Steve is co-portfolio manager of Entermedia, owns a stake inthe Funds' investment management company, and has personal monies invested in the Funds.
Posted by Steve Birenberg at April 26, 2012 11:32 AM in AAPL