AAPL’s 2Q10 earnings: a raft of records, followed by an aftermarket fall

the report

After the close last night on Wall Street, AAPL reported its 4Q10 (the fiscal year for AAPL ends on September 30) results.  At $20.4 billion, quarterly revenue was a record high, as were net profit, at $4.31 billion, and eps, at $4.64.  The company also had record unit sales of Macs, iPhones and iPads.  AAPL guided to December quarter eps of $4.80.

Despite the stellar numbers, AAPL’s stock fell by about 6% in aftermarket trading.   This same fate befell the shares of IBM and VMW, both of which also reported above consensus results after the bell.  So this weakness may simply be the reaction of short-term traders whose plan has been to “sell on the news”–no matter what the news was.  In AAPL’s case, there are one, maybe two, sore points with investors, though–iPad sales and the tax rate.


AAPL sold 3.9 million Macs during the quarter.  That was 440,000 more than in the previous record quarter (3Q10) and a 27% gain vs. the year-ago period.  This compares favorably with the overall PC industry, which grew by 11% vs. 2009.

iPod units fell by about 11% year over year, to 9.1 million.  Hardware revenue fell by only 5.5%, however, as consumers continued to gravitate toward higher-priced models.  Throw in the iTunes store and sales of accessories, and revenues in this very mature segment and revenues were up 5% vs. the comparable quarter of 2009.

With iPhone4 available for the full quarter, iPhone units were up a stunning 91% year over year, compared with a 64% global advance by the smartphone category.  Despite the huge gain, AAPL was capacity-constrained during the quarter and thinks it could have sold more iPhones if it could have manufactured them.

In its second quarter of existence, iPad sold 4.188 million units vs. 3.27 million in its inaugural three months.  Manufacturing capacity, now reportedly at 2 million+ units monthly, appears to have caught up with demand in the major markets where the tablet was launched.  AAPL ended the quarter with an extra 500,000 units in channel inventory.  My guess is that AAPL has about 1.2 million iPad units in stock.  The company’s only comments are that supply and demand are in balance in the markets where iPad is available so far; and that inventories are 3-4 weeks supply, below the 4-6 weeks it would prefer.

The Apple Stores continue to expand rapidly.  At $3.57 billion, up 75% year over year, store revenues were a record.  Sales of Macs totaled 874,000 (another record), half of which went to customers who had never owned a Mac before.

AAPL ended the quarter with no debt and $51 billion in cash.

The fourth-quarter tax rate was 21%, about 5 percentage points below company guidance and about 3.5 percentage points below the full-year rate.  This is partly because sales were stronger than expected in low tax-rate jurisdictions outside the US, partly due to year-end adjustments between what the company estimated (and recorded in its quarterly income statements) its tax liability would be and what it actually turned out to owe.

why is the market upset?

After all, sales of the iPhone4 were at least a couple of million units better than the consensus had expected.  Macs were strong, as well.

The main issue is the iPad, I think.  After all the hype about the device and recent stories by industry experts attributing at least a portion (maybe even most) of the current weakness in consumer PC sales in the US and Europe to cannibalization from the AAPL tablet, expectations were very high.   Investors thought they’d hear that the company was still struggling to meet demand and it had sold about 5 million units in the quarter.  What they heard instead was that inventories were starting to accumulate and that sales were a bit under 4.2 million.

Yes, the “shortfall” in units sold was more than made up for by iPhone strength.  But the iPad market has been transformed in analysts’ minds from one where they can imagine boundless growth for a long time to one where available information forces them to think demand is 1.5-2 million units a month.  To some degree, the “dream” is punctured.

The tax rate is also a potential issue, for me anyway.   The actual 21% meant after-tax income was about 7% higher than it would have been under the 26% rate AAPL had guided to.  But operations were very strong on a pre-tax basis.  And I don’t think today’s Wall Street pays more than fleeting attention to the tax rate in any event.

should it be?

I don’t think so.

Before the earnings announcement, analysts were estimating that AAPL could earn a bit over $18 in the 2011 fiscal year.  That number will probably rise to $19 as the factor the strength of Macs and the iPhone into their numbers.  At $300 a share, that would mean AAPL is trading at under 16x prospective earnings, with over 30% earnings growth in prospect.

Yes, maybe the iPad and iPod results, plus the increasing importance of foreign markets, mean that AAPL products don’t all have immunity from economic weakness in the US and Europe.  Yes, maybe thinking about AAPL’s earnings has lost some of the element of boundless upside.  But, as I’ve pointed out elsewhere, AAPL sports nothing like the 35x-50x PE multiple that a growth stock usually carries.  In anything other than the panic conditions of late 2008 and early 2009, the very low multiple limits any downside, I think.

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