the results

AAPL reported December quarter earnings (the first quarter of the company’s fiscal 2011) after the market in New York closed yesterday.  Revenues were up 70% year on year.  Earnings per share were $6.43 for the three months.  This compares with eps of $3.67 for the comparable period of fiscal 2010–a 75% year on year gain.  AAPL did get a small benefit from the retroactive reinstatement of the R&D tax credit in the US.  Pre-tax results were up 67%.Analysts weren’t anywhere close to the mark.  The consensus was $5.40, a buck a share–or about $900 million–below the actual results.  Wow!

the details

Macs

Desktops were flat at 1.2 million units.  Laptops were up 37% at 2.9 million.  The new MacBook Airs flew off the shelves.

iPhones

Units were 16.2 million, up 86% year on year.  AAPL was supply constrained.

iPads

The company sold 7.3 million iPads in the quarter, 3.1 million more than in 4Q10.  For the three quarters the product has been in existence, AAPL has sold just under 15 million.  Supply has finally caught up with the level of demand.

Consulting firm IDC predicts the tablet market will be 4x the current size–that means around 80 million annual units–in two years.  AAPL sees no viable competition, so far.  In the company’s opinion, no one wants a Windows machine and the Androids available to date don’t have enough functionality.  New Android models shown at the Consumer Electronics Show in Las Vegas recently are just “vapor.”

iPods

Unit sales were down about 8% vs. 1Q10, following recent trends.  After all, something had to be less than perfect.  iPod Touches were up 27%, however and now comprise over 50% of unit volume.

Apple stores

Revenues for this distribution arm were $3.8 billion, up 95% year over year.  Stores in China, only four of them in total, had the highest traffic and highest revenues in AAPL’s retail network.

the Pacific

Revenues in greater China were $2.6 billion for the quarter.  That’s 4x what the company took in during 1Q10, and 2.5x+ its sales for the full fiscal 2009.

Mac sales were up 67% in the Pacific, 10x the pc market growth there.

guidance

AAPL expects revenue of $22 billion and eps of $4.90 for 2Q11.  An observant analyst pointed out that the guidance was for an 18% quarter on quarter drop in sales, which is more than the usual seasonal decline.  Management’s answer could have been that AAPL didn’t know what seasonality in iPad sales might be like–or that rumors of a new version of the iPad to be launched in April might deter would-be buyers.  Instead, the spokespeople kind of laughed at the analyst (whose spreadsheets are meticulous) and said the guidance was for 65% growth and that was enough.

my thoughts

The stock doesn’t look expensive.  APPL made $15.15 a share in earnings last fiscal year.  The analyst consensus prior to this call was $19.94 for fiscal 2011, with the highest estimate at $23.31 (these are all weird, overly precise numbers.  What’s wrong with these people?).  Given that AAPL will likely put up around $12 in eps for the first half, $23.31 looks easily doable.  Let’s say the company comes in with $24.

AAPL was trading at about $350 last Friday.  That would put the stock on 17.5x.  17.5 x $24 = $420.  Using no judgment, but just acting mechanically, if Apple earns $24 a share and if the stock can maintain a 17.5x multiple, it should be trading about 20% higher in the summer/fall than it is now.

Steve Jobs’ health

Of course, I’m kind of worried that the $24 number that I’ve just plucked out of the sky might be too high.  I’m more worried about the multiple, though.  That’s where Steve Jobs’ health problems come in.

A good growth stock, like AAPL has been, has an open-ended quality to it, in two senses.  What makes a growth stock is the possibility that earnings will be better than the market expects for longer than investors realize.  Theres always an “at least as good as…” and an “at least as long as…” aspect to it.  Once a company stops delivering positive surprises, or once the market begins to believe it can see the end of the road of super-good growth, investors begin to treat the stock differently.

Because the market believes in the central role of Mr. Jobs’ creativity in leading AAPL to the iPod and the iPhone, his medical leave raises the possibility that once the iPad has played out–even though that will likely take years–there’ll be nothing left in the company’s bag of tricks to be the next new hit product.

To some degree, this is already happening with AAPL.  Over the past year or more, Wall Street has been reacting to spectacular earnings growth in two ways:  stock price rise, and price-earnings multiple contraction.

As a result of this line of thought, I’m not sure whether AAPL is really cheap at today’s price.

I have a second issue, as well.

To step back and approach the question from another angle–AAPL as a struggling pc company when Steve Jobs came back to work for the company.  He launched the iPod that doubled the size of the firm and had a “halo effect” in reviving interest in Macs.  Then AAPL came out with the iPhone, which doubled the size of the company again.  And he’s now produced the iPad.  To do the same trick again–doubling the size of the company–the iPad has to be 2x the size of the iPhone.  Half the size of the iPhone?  –easy, I think.  the same size?  –doable.  Twice the size?  –no way.

That’s what I believe.  This implies the growth dynamic for AAPL is not as good today as it was a couple of years ago. If the iPad is going to be much bigger than the iPhone has been, then the stock is cheap, in my opinion, even without Steve Jobs.  But I can’t convince myself it is.

So I have little desire to buy–although I may well get a second-generation iPad when that comes out.  I don’t own the stock today, but my sense is it wouldn’t be my biggest position any more but I’d hang onto some.