Apple's Non-GAAP Earnings Are the Real Story

Apple's (AAPL) earnings clobbered the analysts' forecasts again. That's not what this article is about.

Sure, Apple beat just about every forecast out there. And it did it once more with hands tied behind its back. That's because iPhones sold this current quarter are for the most part deferred, only to be dribbled out over eight quarters. The subscription accounting Apple uses makes GAAP earnings more of a history lesson rather than a depiction of how the quarter went. The real Apple story is not the GAAP earnings. It's the non-GAAP earnings that matter, the ones that allow investors to see in real time what the company actually made. After all, desktops and notebooks didn't blow away the numbers. It was the iPhones that did with a 302% increase year over year.

Apple made $1.33 in GAAP earnings. Nice. But, when current iPhones are included (and old iPhone sales are excluded), non-GAAP earnings are even more extraordinary at $1.84.

So let's take stock of the first half of 2009 non-GAAP earnings. To date, Apple has made $4.40 in non-GAAP to date. Think about how different PE values would be if investors took note of the E as non-GAAP earnings. Right now trailing PE the last three quarters would be $122/$7.09, or 17. That doesn't include Q3 2008 because Apple didn't break out their non-GAAP earnings. Clearly it's going to have been greater than reported GAAP of $1.19. Let's assume it's $1.19. That makes trailing PE for last four quarters 14.7. Forward PE is probably close to 10.

Apple is a screaming buy because the market undervalues its earnings by ignoring the truer non-GAAP earnings.

Disclosure: Author holds a long position in AAPL

Comments

[Moon Kil Woong:]

Actually, the gross margins, market share, and numbers sold is what matters more than how they recognize revenue. Since Apple is traded mostly by tech savvy investors GAAP or non-GAAP issues are not the biggest concern.

Currently, I hold no shares of Apple and have no short positions in it either.

Apr 23 05:16 AM

[awcabot:]

Fact check: Apple posted EPS $1.33, GAAP.

Apr 23 06:20 AM

[Stephen Ros...:]

Thanks, awcabot. I wrote 1.21 rather than the accurate 1.33. 1.21 is the net income in billions. My apologies.

Apr 23 07:24 AM

[Shira Jacobson:]

Thanks to you both. We've corrected the figure in the article.
Regards,
Shira Jacobson
Seeking Alpha Editorial Team

Apr 23 07:55 AM

[firstadopter:]

You forgot to mention Apple has $32 in net cash per share and no debt. That makes your P/E multiples ex-cash much lower and attractive.

Apr 23 08:24 AM

[winindthedust:]

Screaming buy is right!

Apr 23 11:55 AM