Apple Beats Again: It's Hard to Argue with the Facts

With the Nasdaq pacing the other market indicators throughout the trading day, it was clear that Technology was on the mind of most Traders. With eBay (EBAY) reporting numbers to an enthusiastic response, next in line was the mighty folks from Cupertino, waving their iPhones and Macs, sans Legal Copy (If you haven't seen the latest I'm a Mac ads you are missing out on high comedy).

For Apple (AAPL), this quarter was met with tempered expectations. Charts and Graphs flew across the Internet, projecting the sky was falling for the Mac. Well not exactly falling, but some rather large chinks in the armor were showing. Microsoft (MSFT) ads that actually garnered praise! Mac sales at a year over year drop for the first time since 2003! Apple not in the fast growing netbook Market! Pres, Androids, Berrys aplenty! Where's Steve? I think you get the gist, a lot of shouting and hand waving by analysts and the media, some thoughtful, most not so much.

Even, Apple's number 1 business fan, CNBC's Jim Goldman (who in a recent piece comparedMacs to PCs on price and intangibles) made a point to mention that Macs come with Photoshop!? Perhaps a confused slip of the tongue but nonetheless tried and true stockholders are wondering if anyone outside the Apple circle truly understands the business. And in all likelihood, that's the reason the shares are so under appreciated and victims of manipulation and rumor.

But there's a little something called cold hard facts, and Apple's been providing them aplenty, quarter after quarter. And with that, providing what seems like quarter after quarter of what I like to call 2/3rds guidance. When will the pros just forget about those last two sentences in every Apple press release.

But now to the hard hitting stuff, the news that matters, the numbers.

• Revenue: $8.16Billion vs $7.7Billion expected
• Earnings: $1.33/share vs $1.09/share expected
  
• Mac Units: 2.2Million vs 2.1-2.2 expected
  
• iPod: 11Million vs 10Million expected
  
• iPhone: 3.8Million vs 3.3Million expected

That's as clean a sweep across the board as you can see. The worrisome figures for most coming in was the Mac line, however this business is on solid footing now as the recent desktop line upgrades start to bring in repeat customers while the popular MacBook designs continue to impress laying Mac styling in front of and towards the general public. In an economy where the most popular computers across the board are $300-$500 netbooks, Apple is doing very well at its "premium" price points. The upgraded Mac Mini and the last generation MacBook give Apple some penetration in the sub-$1000 market.

iPhones continue to be big, and not only for Apple. Analysts were scrambling to revise their iPhone estimates upwards as AT&T (T) reported very strong wireless results as part of their quarterly report. With 1.6Million iPhone activations (only 300K less comparatively to the holiday quarter) AT&T was quick to point out that iPhone subscriber churn is extremely low (customers love their iPhones) and iPhone ARPU was 1.6 times the average (customers love spending on data plans).

Basically the iPhone's little sister, the iPhone Touch continued to increase in popularity as the AppStore has proven to be an incredible driver of not only adoption, but also loyalty. With Apple about to cross 1Billion applications downloaded this marketplace becomes the fastest growing software distribution channel in history. With combined iPhone and iPod Touch sales totaling 37Million units and counting, the install base for developers is only continuing to grow. And as Apple readies the reported and rumored "iPod Touch HD", their curveball into the netbook/tablet market, be sure it'll be accompanied by an AppStore of its own.

How did Investors react to the news? At first nonchalantly, Apple sold off late in the day as worries seemed to creep into the stock. After-hours however a 3% gain on solid results but sluggish guidance. The guidance number was partially explained on the call, which I'm sure has yet been properly disseminated. Apple is recording no Revenue from iPhones sold after their March event of iPhone software 3.0. This is all due to some technically complex accounting rules that allow their subscription based model to yadda yadda yadda (Insert Legal Copy). In a nutshell, by doing this they can legally give iPhone users the upgrade for free. iPod Touch users however, are stuck with another Hamilton (Doesn't have the same ring to it as a Benjamin does it?).

Since the software is set to come out in June, that's essentially an entire quarter of 0 recognized iPhone revenue. Kinda sounds like it fits nicely in the gap between Apple Revenue guidance and Analyst Revenue expectations doesn't it? Provided that the analysts have finally deciphered the enigma code that is Apple's subscription accounting method wherein all iPhone revenues, profits etc are split amongst 8 quarters while the rest is deferred into an ever increasing cash pile which at the moment stands at $29Billion.

To be fair, Apple has begun giving Non-GAAP accounting to try to set Wall St. straight. And by those metrics, the earnings are just staggering.

• The Current Quarter: $1.84/share
• Last Quarter: $2.58/share
• Quarter before that: $2.74/share

So the last 3 quarters of "real" earnings paint a picture of $7.16/share in earnings for a stock priced at $125. That's a P/E of 17 in 3 Non-GAAP quarters! Considering the $33/share in cash that Apple holds, that 3-quarter P/E ratio falls to 13. Looking ahead to the next quarter on a Non-GAAP basis and Apple is likely to earn close to $9/share (vs a comparitive estimate of the GAAP earnings of about $5.55/share).

This company is still undervalued, and while their entry into the netbook/tablet space will be closely watched, so will be the return of CEO Steve Jobs. Rumors and stock market games aside, Apple is an incredible money printing design house and because of its accounting rules it still seems "expensive" to some. An injustice that will hopefully be corrected as next-quarter analysts will have a full year of Non-GAAP numbers to look over and use in their predictions. Then maybe it'll be Apples to Apples.

Disclosure: Author owns AAPL, T, holds Call Options in MSFT

Comments

[Zoltan L. K...:]

Apple looks fine from a strategic, a valuation, and a technical view. The main risk is the development of the general market. Other things equal AAPL has a strong relative position. The education market could be somewhat better, but a new netbook could offer at least a partial remedy in this segment.

Apr 23 11:03 AM

[neutrino23:]

I don't see how a netbook would help. Why would replacing a $1,500 product with a $500 or $400 product help the bottom line?

Unless the economy completely goes off the cliff this will be another very good year for Apple. New iPhones and iPod touch in June. Snow Leopard coming some time this summer. Intel will release significant upgrades to their line of laptop CPUs this fall so the laptop line will see a significant bump.

An interesting thing is that the pool of iPhone and Touch users continues to grow providing a larger and larger market for the App Store. In turn, as the App Store grows it attracts more people to the iPhone and Touch.

Apr 23 06:33 PM

[Tom B:]

It's almost funny-- people spend $400 on a Netbook, when they could get more functionality with greater portability from an iPhone/iPod Touch.


On Apr 23 06:33 PM neutrino23 wrote:

> I don't see how a netbook would help. Why would replacing a $1,500
> product with a $500 or $400 product help the bottom line?
>
> Unless the economy completely goes off the cliff this will be another
> very good year for Apple. New iPhones and iPod touch in June. Snow
> Leopard coming some time this summer. Intel will release significant
> upgrades to their line of laptop CPUs this fall so the laptop line
> will see a significant bump.
>
> An interesting thing is that the pool of iPhone and Touch users continues
> to grow providing a larger and larger market for the App Store. In
> turn, as the App Store grows it attracts more people to the iPhone
> and Touch.

Apr 23 11:10 PM

[Steve Biren...:]

Good stuff as usual, Chris. But just to be clear, iPhone revenue from units old prior to 3/17/09 will be recognized in the current quarter. Missing effectively 1/8th of revenue on phones sold from 3/17 thru 6/30 does partially explain conservative guidance, however.

Looking back at last few years, June quarter tends to be sequentially flat to up slightly on revenue and EPS from March. That would suggest $8 billion and $1.33. The gross margin this quarter was uncommonly high, even for Apple, so some downtick sequentially in EPS seems likely. Revenue trends and especially product flow will be the drivers for the next few months.

Apr 24 08:39 AM