Back on January 21, 2011, I predicted Apple's (AAPL) April 20 earnings. How did I do? I forecast $5.47 to $5.87, certainly not reaching the $6.40 Apple would indeed earn. However, the prediction beat 28 analysts, matched 8 analysts, and was beaten by only 2. Again, I'll use 2 metrics with graphs to come up with what I consider to be a conservative estimate three months out, that I expect Apple once again to beat.
So how do you capture AAPL's strength in a mathematical model, keeping it simple and easily understandable? One that will allow predictions months in advance?
I use two measures: the number of devices sold (N) and operating income per device (OPD). N x OPD equals operating income, the holy grail of Apple predictions.
N groups together all Apple's products, iPhones, iPods, iPads, and Macs, in one figure plotted over time. Gathering these different devices together in such a manner allows one to see Apple's enormous growth. By combining product lines, you avoid getting lost in the maize of different devices.
Since 2004, Apple has sold over 510 million devices, with 83 million sold in just the last two quarters. The run has been strong even when you break down each quarter. Looking at the graph of devices sold, you see that the strongest runs have been this year. Q1 and Q2 of 2011 have produced the most remarkable growth in sheer numbers of products sold. Given the steeper slopes of Q1 and Q2 you can make a strong case that the momentum will spill over into the traditionally weak Q3 quarter and most likely reach 37 to 38 million devices.
(Click charts to expand)
Apple's operating income per device reached $219 a device, a record for the company. (Imagine any other company increasing how much it earns on its average device year after year for the last 7 years.) This quarter didn't have any sign of slowing down as we saw in Q4 or Q1, just steady growth. Q1, the Christmas season, is a time when even Apple does some discounting. Next quarter, Q3, should produce an identical path to Q2. Q3 has mimicked Q2 for the last 7 years; I see no reason for the pattern to diverge. Therefore, I am modeling an OPD of $221 for Q3.
Thus, Apple should sell 37 to 38 million devices at an average operating income per device of $221. The number of devices sold may be on the conservative side: Apple was constrained this quarter by limitations in iPad supply and will also benefit by its roll out of products throughout the world. In sum, Apple Q3 should make $8.2 to $8.4 billion in operating income. Assuming 24% tax and 936 million shares, Apple's Q3 comes to $6.66 to $6.82 (conservatively barring, as usual, unforeseen events; after all, 3 months is a bit far out). Analyst consensus is now at $5.59. Apple has guided to $5.03 for next quarter. Over the next 3 months, analysts will raise their estimates closer to mine, likely to $6.40, and I will likely raise mine.
Disclosure: I am long AAPL.