AAPL’s 3Q12: more questions than answers

the results

After the New York close yesterday, AAPL reported financial results for 3Q12 (APPL’s fiscal year ends in September).  The company recorded revenue of $35.0 billion (+22.4%, year on year) for the three months and net profit of $8.8 billion (+20.3%).  Earnings per share were $9.32 (+19.6%).

For most companies, these figures would have been great news.  But for AAPL, the results represent a marked deceleration from the growth rate it had been achieving over the past few quarters.  And, although the eps exceeded AAPL’s always ultra-conservative guidance, they fell substantially below the Wall Street consensus estimate of $10.37.

earnings revisions underway

As I’m writing this, those analysts are in the process of revising down their expectations for 4Q12.  Although the process isn’t yet complete, it looks like the 4Q12 consensus will drop by about a dollar a share, from $10.50 to $9.50.  That would leave the consensus for the current fiscal year at around $45.

Next fiscal year is a more interesting issue.  The current earnings consensus is about $55.  I don’t think there’s any particularly penetrating insight built into this number.  I view it more as an extrapolation of the earnings progress we’ve seen (until) recently, with some room left for upward revision.

If, however, we do the same kind of back-of-the-envelope calculation based on 3Q12 actuals and the new 4Q12 estimates, we get a full-year run rate–without factoring in any growth–of $40-.  We’re also looking at what would now appear to be very challenging earnings comparisons for 1Q13 and 2Q13 (the actuals for 1Q12 and 2Q12 are $13.87 and $12.30 = $26.17).  I don’t think analysts will change their year-ahead numbers today.  But I’d expect their earnings forecasts for fiscal 2013 to drift down toward $45-$48 over the next month or two.


–Mac sales (14% of the AAPL total) were flat, quarter on quarter, and up 2%, year on year.  That’s better performance than the PC market overall had, but not by much.  Buyers may have held back until late in the quarter when a new line of laptops, containing more powerful INTC chips, was launched.  Still…

–iPhone sales (46%) were down 26% qonq and up 28% yoy.  Here, too, results may have been negatively affected to some degree by potential buyers waiting instead for the next iPhone, rumored to appear in the fall.

–iPad sales (26%) were the high point of the quarter, growing by 44% sequentially and 84% yoy.

–the rest, which probably won’t make much difference to investors:  iTunes sales were $1.8 billion; iPod units were down 10% qonq and -12% yoy.

–Europe, which accounts for somewhat less than a quarter of AAPL’s business, showed no growth at all.

my thoughts

The strength of the dollar, buyers holding back with the expectation that fresh versions of new products will soon be on offer, and distributors shrinking their inventories all seem to have subtracted a bit from AAPL’s 3Q sales.  But I see all these as minor negatives, whose absence wouldn’t have materially changed results.  Ex the iPad, AAPL’s business has slowed down considerably from the torrid pace of the first half of the fiscal year.

The question is why?

Certainly, the slowdown in world economic growth caused by the EU financial crisis is playing a role.

Other, structural, factors might include:

–changing market dynamics in smartphones, as weaker competitors like RIMM and NOK have no more market share to lose, and the new, more difficult, struggle for customers is between AAPL and Samsung

–the development of $100 and $200 smartphones for low-end customers, a segment AAPL won’t participate in, is cutting into business in China

–the emergence of ultrabooks as lower-cost, Windows-based competitors to the Macbook Air

–higher-end buyers of tablets deferring purchase so they can see new Windows 8-based offerings in the fall.

My guess is that the main culprit–if that’s the right kind of term to use for a $8.8 billion profit–is the macroeconomy.  But I also think we’re seeing the first signs of a serious competitive response to AAPL’s market dominance of the past few years.  Usually, though, structural market share shifts don’t happen all at once.

the stock

How much does pondering about the competitive environment for AAPL actually matter for the stock?

Not much, in my view, unless you take an extremely negative view of how competition in the smartphone and tablet markets will play out for AAPL–in other words, unless you think AAPL is going to turn into a CSCO or MSFT.  My basic thought is that the worst that can reasonably be expected to happen has already been discounted by the market by the repeated reluctance of AAPL’s PE multiple to expand in response to stellar earnings reports.

To fool around with a few figures,

…let’s assume that AAPL will have eps of $45 a share in fiscal 2012.  That’s not a super-conservative number, but I don’t think it’s aggressive, either.  Were world economies to turn up over the coming year, it might end up being pretty low.

The current share price is about $575.  Subtract out the $150/share in cash AAPL will have by the end of fiscal 2013.  That leaves a price of $425–meaning a PE, ex cash, of 9.4x.

That’s too low, to my mind.

9.4x is about 10% below the forward PE on the S&P 500.  It’s about the same rating as MSFT gets, and it’s about a point above CSCO’s.  But both of these latter firms have weak management and negligible profit growth prospects.

In other words, AAPL already trades as if it has gone ex-growth.  I think that’s the reason AAPL is only down 4% as I finish this post, despite having missed the Wall Street consensus by a mile.

The risk is, of course, that AAPL somehow goes the way of MSFT or CSCO.  If it can manage to avoid that fate–and I think it will–downside appears relatively limited.  And the upside in a stronger world economy could be large.



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