Sink Or Swim? Apple's Q1 Guidance Will Tell The Tale

Oct.21.13 | About: Apple Inc. (AAPL)

Apple (NASDAQ:AAPL) will release is fourth quarter results on October 28, 2013. Typically a soft quarter, this year's release of the iPhone 5S and iPhone 5C is likely to make this one more interesting, with the reported sale of 9 million iPhones over the launch weekend and rave reviews of the iPhone 5S with its A7 processor and fingerprint reader.

The colourful iPhone 5C was less well received and there are reports Apple has cut back on production of this lower priced iPhone. Some are calling this product a failure and comparing it to the Surface RT. Like the Surface RT, I think it will find a market if properly priced.

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iPad sales are likely to have continued their slow descent in the quarter as their market share erodes and "Phablets" in Asia encroach into traditional iPad territory while potential buyers await the impending launch of the iPad 5 later this month.

The rest of Apple's business comprising iPods, iTunes and downloaded applications likely continued its steady growth.

As a result the quarter should be a smidge better than uneventful. My estimates are for revenues of $37 billion with net income of $7.3 billion or about $8.00 a share.

Product

Units sold (MM)

ASP

Revenue ($B)

Mac PC's

4

$1,300

$5.20

iPads

13

$425

$5.53

iPhones

35

$600

$21.00

iPods and other*

$5.50

TOTAL REVENUE

$37.23

GROSS MARGIN (37%)

$13.97

EXPENSES

$4.00

TAXES (26%)

$2.64

NET INCOME

$7.33

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* includes $200 million other income

The real action will come from guidance. With the iPhone 5S proving much more popular than expected and Apple reportedly upping production of the new device by as much as 75% recently, Apple's look into the strong Christmas quarter will be telling. Apple is releasing what is expected to be a new iPad on October 22, 2013 at a recently scheduled launch event.l

No one knows what it might look like, but it is reasonable to expect it to include the new A7 processor and a fingerprint reader as well as being lighter and thinner than its predecessor. There is a lot of competition in the tablet area this year including a plethora of new devices from both Android and Windows 8 suppliers and Microsoft just released Windows 8.1 to generally positive reviews. Accordingly, I believe iPads will not take off but the new product might be enough to slow the decline in market share Apple has been suffering in tablets.

I anticipate Apple's guidance to point to Q1 sales of $55 billion and margins to remain in the 38% range. In my view, higher margins on iPhone 5S will be a tailwind but to a certain extent offset by lower margins on other products. If there is an upside surprise, it is likely to be a combination of higher forecast volumes and margins for the iPhone 5S, but with the number of competing brands now in the smartphone space and the saturation of the high end portion of the market where Apple products are targeted, I think that unlikely.

My forecast for Q1 2014 is revenues of $55 billion with net income of $12.6 billion or about $13.70 a share. Despite the success of the iPhone 5S, the quarter should display a flattening of both revenues and profits and, in my view, a stock market less inclined to bid up Apple shares.

Product

Units sold

ASP

Revenue ($B)

Mac PC's

4

$1,300

$5.20

Ipads

21

$425

$8.93

IPhones

55

$600

$33.00

IPods and other

$8.00

TOTAL REVENUE

$55.13

GROSS MARGIN (38%)

$21.20

EXPENSES

$4.00

TAXES (26.5%)

$4.54

NET INCOME

$12.6

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I think Apple continues to do a terrific job of developing outstanding products and the advancement of its processor technology with the new A7 64-bit processor is industry leading. Apple's loyal fan base and world leading brand image make it a powerful franchise.

Notwithstanding, in maturing markets and facing increasing competition, I don't think Apple can sustain profitability at current levels and expect to see the stock sell off into the new year.

As a result, I remain short the name through a short call position.

Disclosure: I am short AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. I am short AAPL calls and may also short the stock on any strength following its earnings release October 28th