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Tag Archives: AAPL
AAPL’s awesome 1Q12
the report
After the close of New York trading on Tuesday January 24th, AAPL announced results for 1Q12 (AAPL’s fiscal year ends in October).
The company reported its best single quarter ever, with diluted earnings per share of $13.87 on revenue of $46.3 billion. Sales were up by 73% year on year for the three months; eps were up by 116%. Wall Street analysts had been anticipating earnings of $10.16 per share. AAPL not only handily beat that figure, but also blew through the high end of the estimate range at $11.26.
Management’s (notoriously lowball) guidance for 2Q12 is for revenue of $32.5 billion and per-share profits of $8.50.
AAPL shares rose by 6.3% in the Wednesday market. On the surface at least, this strikes me as a tepid response to the numbers. More on this topic below.
the details
quibbles first…
–AAPL is another one of those companies that uses the week rather than the month as their basic unit of time. This creates a problem, because a year is equal to 52 weeks plus one day for regular years, plus two days for leap year. So companies like AAPL have to throw in an occasional quarter that has an “extra” week in it to keep their reporting year and the calendar in sync.
1Q12 was one of those adjustment quarters. Not only that, but the extra week was the high-volume sales period between Christmas and New Year’s Day. So AAPL’s sales for the three months were likely 10% or so higher than they would ordinarily have been.
–the introduction of the iPhone4S shifted revenue out of 4Q11 and into 1Q12, because AAPL ran down inventories of its older phones and consumers deferred iPhone purchases until the new model became available.
–don’t make the same mistake I’ve heard from Bloomberg radio commentators of saying that this quarter’s earnings were more than AAPL made in a whole year not that long ago. This sentiment is correct, but the comparison isn’t. AAPL changed its accounting treatment for iPhone sales a couple of years ago to recognizing all the profits from a sale (markup on the device + a share of revenue collected by the telecom company over the life of a contract) up front, rather than recognize them gradually over the (usually two-year) contract term.
…followed by stunning numbers (ex the iPod)
iPhone
In 1Q12 AAPL sold 37 million iPhones, with iPhone4S leading the way. That’s up 126% yoy, in a market that expanded by 40% over that time. It’s also 17 million more than AAPL’s previous record for a quarter. Sales would have been even higher except AAPL ran out of phones to sell in key areas.
iPhone 4S wasn’t available in China during 1Q12. It went on sale there earlier in the month. Demand has been “staggering.”
iPad
APPL sold 15.4 million iPads during the quarter, up 111% year on year. According to CEO Tim Cook, the launch of AMZN’s new Kindle lines has had no effect, good or bad, on sales.
Macs
AAPL sold 1.48 million iMacs and 3.72 million laptops, both records, during the quarter. Desktops were up 21% in units yoy; laptops were up 28%. Industry growth was zero.
iPods
This declining category of devices was up 133% quarter on quarter for AAPL, but down 21% yoy. iPod Touch remains the lion’s share of sales. APPL retains a 70% share of the MP3 player market in the US and is the top-seller in most other markets (not that any investor is going to buy AAPL’s stock because of the iPod anymore).
other stuff
Sales at the Apple Stores, which make up almost a third of retail revenue for AAPL, were $6.1 billion during the quarter. Average revenue per store was $1.7 million, up 43% yoy.
The iTunes store took in $1.7 billion.
Weak worldwide demand for tech components gave AAPL a lot of buying clout for NAND flash and DRAM during 1Q12. As a result, the company’s gross margin was unusually high at 44.7%. To give a basis for comparison, full-year 2011 gm came in at 40.5%. This favorable development probably also boosted net income by 10%.
AAPL has $97.6 billion in cash on the balance sheet. Of that, $64 billion is being held offshore.
the stock
Trying to “normalize” 1Q12 eps by correcting for the extra week and the elevated gross margins, I come up with a figure of $11.50 or so for the quarter. If I had to guess, I’d peg full-year eps at least $40, even after a downward adjustment of 1Q12 results–meaning reported figures could be closer to $45 a share.
If I’m correct, AAPL shares are currently trading at, at most, 11x this year’s earnings, with 40%+ earnings growth in prospect. That strikes me as really cheap. Subtract AAPL’s cash from the equation and the forward multiple is 8.5x.
In contrast, WMT, which has nothing like the recent growth record or current prospects of AAPL, is trading at about 12x.
COH, a global semi-luxury company, whose stock has paralleled AAPL over the past year, and which has far better growth characteristics than WMT, trades at almost double the PE of AAPL. But even COH probably won’t grow as fast as AAPL this year.
Why the low valuation for AAPL?
I think Wall Street views AAPL as a firm built at present on a single product, smartphones. It perceives the global transition from feature phones to smartphones, which is at least part of what’s driving the company’s extraordinary growth, to be mostly played out. Therefore, investors theorize, AAPL will sooner or later–and probably sooner–be reduced to depending on replacement demand. When that happens, its earnings growth will shift into a much lower gear.
There’s some truth to this idea. Look at the breakout of AAPL’s revenues during the current quarter:
iPhone 53% of sales
iPad 20%
Macs 14%
iPods 6%
Music services 4%
Other stuff 3%
Total = $46.3 billion.
After iPhone and iPad, nothing else moves the needle that much. A half-decade ago, the iPod doubled the size of AAPL; the iPhone then doubled (a much larger) AAPL again. Can iPad perform the same trick for AAPL a third time? Eventually, maybe, as part of a transformation of the personal computer market over the next decade. But I’m not sure many people would like to bet on that.
And, of course, NOK and RIMM are reminders of how fast the tech world can change.
Potential pitfalls may be Wall Street’s current focus, but it’s by no means the whole AAPL story.
As I’ve been writing for some time, AAPL shares have suffered immense PE contraction over the last four or five years, both in absolute terms and relative to the market. According to Value Line, AAPL traded at a 40% premium to the market multiple in 2007 and a 60% premium in 2008. By my reckoning, AAPL is now selling at a 25% discount to the market–a much lower level than firms (like WMT) with weaker business models and balance sheets.
That’s actually the good news. The fact that a huge amount of potential future bad news seems to me to be already baked into the stock price is a powerful argument for owning the stock. In fact, I think the market is discounting a far worse future for AAPL than is likely to develop.
Can AAPL do anything to help its own cause? The company could begin to pay a dividend or split the stock. Either would give the shares a short-term boost. In the final analysis, however, all AAPL can really do is continue to post strong earnings to show that Wall Street fears are overblown.
AAPL’s 4Q11: another strong quarter
the results
AAPL reported 4Q11 results after the close of trading in New York yesterday. The company earned $6.6 billion ($7.05 per share) over the three months, on revenue of $28.2 billion. This is an advance of 52% in eps, year on year, on sales growth of 39%. Although the company exceeded its guidance of $5.50 per share handily, it failed to beat the Wall Street analysts’ consensus, $7.39 a share, or the first time in a long while. (The StarMine consensus of analysts who have historically been the most accurate forecasters–which in this case may simply have been the most aggressive–had been $7.51.)
EPS for the full fiscal year 2011 (ended September 24th) were $27.68, or 82% better than results for fiscal 2010.
AAPL also gave guidance for the holiday quarter we’re in now. APPL’s 1Q12 will have 14 weeks in it instead of the normal 13. This is an adjustment companies who organize themselves on a “weeks” basis rather than a “months” basis must make every six years or so to make sure their fiscal year remains aligned with the calendar year. Anyway, AAPL’s guidance for 1Q12 is eps of $9.30. My rough guess is that this equates to a “normal” quarter of $8.50, which would be a gain of about a third over the $6.43 AAPL reported in 1Q11.
As a result of its earnings “miss,” AAPL shares are down about 6% in pre-market trading as I’m writing this.
details
iPhone
Let’s get straight to the heart of the earnings “shortfall,” if that’s the right word to describe a quarter that’s up more than 50% year on year. It comes in the iPhone.
AAPL sold 17.1 million iPhone units in 4Q11. That’s up 21% year on year, and an all-time record for a September quarter, but down 16% from the record 20.4 million the company sold in 3Q11. There were two reasons sales weren’t higher, both related to the introduction of the new iPhone 4s.
–AAPL decided not to add any new carriers to its iPhone network in the September quarter; and
–consumers slowed down purchases of the iPhone 4 in anticipation of the new model they expected to debut during 4Q11. As demand waned toward quarter end, carriers slowed down purchases of iPhones from AAPL. Apple Store sales of iPhones were particularly weak.
APPL has since reported that the iPhone 4s has sold over 4 million units during the first three days of its launch in early October, more than double the rate at which the original iPhone 4 left the warehouses when it first came to market. At $645 each, those sales amount to $2.6 billion, or about $.85 a share. They could just as easily have occurred in 3Q11 if AAPL had moved the launch date of the 4s back to late September rather than early October.
How good is the iPhone business today? “In our wildest dreams we couldn’t have gotten off to a start as great as we have on the 4s,” says CEO Tim Cook. Cook also noted that AAPL had anticipated a much larger reduction in telecom purchases of the original iPhone during the quarter than what actually occurred.
iPad
AAPL sold 11.1 million units during the quarter, an all-time record. That’s up 20% quarter on quarter and 166% year on year. AAPL finally seems to have obtained enough manufacturing capacity to keep up with demand.
Macs
Unit sales were up 37% year on year and 30% quarter on quarter. That’s also an all-time record. AAPL sees some cannibalization of the Mac business by iPads, but is still producing growth much greater than the PC industry.
iPods
Once half the company, iPods are now less than 10% of AAPL’s revenue. Unit sales were 6.6 million during the quarter, down 27% year on year and 12% sequentially.
my thoughts
Even with an extra week to work with, I don’t think AAPL’s profits can be up 82% again this fiscal year. Suppose they “only” reach $35, with (to make the arithmetic easy) $1 of that coming from the 53rd week. Organic growth would then be in the low 20% range, which I think is easily doable. It could be very much higher.
At a $400 stock price, AAPL would be trading at a forward multiple of under 12x on my low-ball figure. Subtract out the $86 a share in cash (remember, AAPL has no debt) on the balance sheet from the stock price and the multiple shrinks to about 9x. Even factoring in a substantial maturing of AAPL’s businesses, of which there’s no credible evidence yet, AAPL shares seem very cheap to me.
4 points about the Kindle Fire
1. Thank book publishers for the Kindle Fire.
AMZN’s initial strategy for e-books was to compete on price. In fact, it started out offering e-books as a loss leader. It was paying the publishers $12.50 for a new release and selling it as an e-book for $10.
The book industry didn’t like this one bit, however, because it feared the tactic would destroy the independent bookstore distribution channel. So it forced AMZN, by threatening not to sell books to the company, to charge $13-$15 an e-book for new releases and keep 30% for itself (see my posts on Kindle economics for more details). Take that, AMZN!
As I pointed out then–nothing requiring much insight, only having watched Jeff Bezos operate over the years, I thought AMZN would likely shift to using its hardware as a loss leader to build up sales volume. The process took a little longer than I anticipated, but the Kindle Fire is the result.
According to iSuppli, the components in the Fire and their assembly cost AMZN about $210 a unit, meaning the company gets no recovery of its research and development costs, and loses $10+ for each unit sold, to boot. If AMZN marked up the Fire the way AAPL does the iPad, it would sell for $275-$300. Vintage Bezos.
Presumably, though, the early devices have a lot of redundancy built in (what a disaster if the first ones broke a lot). But component prices will fall, and the device will gradually be simplified. My guess is that AMZN will cross the breakeven line in the second half of next year.
2. Fire is the star, but there’s a mini-explosion of regular Kindles as well.
Along with the 7″ color-screen Fire, AMZN is introducing a new 6″ e-ink Kindle with audio and text-to-speech. The latter comes in touch screen and physical keyboard models. With 3G connectivity, they cost $189. They’re $40-$50 less with wi-fi only (which is what the Fire has). You can knock another $30-$40 off is you’re willing to accept advertising.
And, of course, there’s still the original 6″ Kindle at $109 and the jumbo-size 9.7″ Kindle DX at $379.
3. AMZN is already offering Fire extras.
For example, there’s:
–a two-year extended warranty, that also covers three instances of accidental damage, for $44.99,
–a cover for, $24.99-$44.99, and
–streaming of TV shows and movies through Amazon Prime–which costs $79 a year and also gets you free two-day shipping on all AMZN purchases.
4. AMZN’s formidable cloud computing capabilities back the Fire, too.
AMZN is promising super-fast internet browsing with the Silk browser every Fire comes equipped with.
How so?
AMZN’s on-line retailing operations require massive server banks. Because the company has to have enough capacity to handle surges in demand during peak selling periods, it can often be left with as much as 90% of its servers idle. Years ago, it turned to providing cloud computing services to third parties as a way of using this asset better. Its careful study of its customers’ behavior while on the Amazon site has also given it the ability to anticipate their needs–meaning it will be able to pre-load onto a Fire device likely next pages even before the user tells the browser to request them.
More about this tomorrow.
my thoughts
Fire may not have the upscale cachet of the iPad. But the price is right at the level where surveys of US consumers suggest they’re willing to buy a tablet. It’s small, weighs less than a pound and has a battery life that AMZN puts at 8 hours of active use.
It seems to me the Fire will prove very attractive to consumers on the go, just as the early netbooks drew traveling businessmen for their light weight and essential functionality. I doubt the form factor will stagnate in the way that netbooks did, though, and I don’t expect the iPad will move downmarket to challenge. AMZN could easily be a very big winner with the device.
tablets as online retail magnets
tablets as online money machines
Yesterday’s Wall Street Journal has an article about tablets and online spending. Its conclusions:
–9% of online shoppers own tablets and half use them to shop.
–conversion rates (that is, the percentage of site visitors who actually buy something) for tablet users are typically 4%-5% vs. 3% for PC or cellphone users. One site mentioned reported a whopping 10% conversion rate from tablets.
–tablet users spend 10%-20% more than PC or cellphone users when they buy.
–tablet users don’t like apps. They use browsers to visit retail sites.
–retailers are starting to tailor their sites to make them more enticing to tablets. This means more slideshows and videos. Because virtually all tablets are iPads this implies using alternatives to Adobe Flash.
A bit of arcana: a huge amount of web design time and effort goes into designing attractive buttons on websites (strange, but true). All of that needs to be revamped so buttons are big enough for fingers to use them.
my thoughts
Retailers don’t seem to know why tablet-wielding visitors are so much more attractive customers. That they are seems to be enough to spark a website gold rush to attract them.
It may be that tablet owners are more affluent than the general online population. That might explain the higher average purchase. On the other hand, the article mentions that QVC, which doesn’t attract a wealthy demographic, is particularly enthusiastic about its tablet business.
It could be that, because they’re instant-on and portable, tablets encourage impulse purchases. That might explain the higher conversion rate. If so, the tablet edge should vanish as solid state memory laptops, like the MacBook Air or ultrabooks become more common. Given that the latter two are significantly more expensive than tablets, that may take some time, however.
(By the way, conversion rates are a bit more complicated than bigger-is-better. It’s generally agreed that a conversion rate below 1% is bad and that 5% or higher is unusually good. But if traffic is directed to your site through search engines, the cost of keyword purchase has to be factored in as well.)
It’s also possible that there’s something addictive about the tablet experience, sort of like that way people spend a lot more when they use a credit card than when they use a debit card. If so, big spenders may end up getting unsolicited gifts in the mail of tablets with retailers’ catalogs and URLs pre-loaded.
investment implications
It seems to me this phenomenon is a mild positive for AAPL, but nothing to run out and buy the stock for. For retailers, the quality of their websites may become more crucial in their sales efforts.
Anyone with a Flash website may find his popularity diminished–although I understand this is a much bigger problem in Europe than elsewhere.
This isn’t a positive for ADBE, but it remains to be seen how significant a negative it is.
