Apple (AAPL) reported second quarter 2012 earnings yesterday and investors can finally breathe a sigh of relief. Apple touched $555 intraday on Tuesday and investors' confidence was pushed to the limit as the stock broke below its 50 day moving average. It was mere weeks ago when Apple was soaring with a new all-time high above $640. The volatility of the past two weeks could shake even the most confident Apple bulls.
Throughout these declines I have been practically begging investors to take advantage and add to their Apple positions. With Apple rallying back to $600 in after-hours trading on Tuesday it certainly appears that investors were rewarded for taking the short-term contrarian position and buying into the weakness. I did what few others did and put my money were my mouth is.
I went into the quarter owning Apple as well as May 700 options to capitalize on a bounce. My conviction was strengthened by the fact that Apple is increasingly a global corporation and is increasingly less reliant on US telecom giants Verizon (VZ) and AT&T (T). I have analyzed the earnings release and conference call from yesterday afternoon and presented the key metrics below:
iPhone: Robust sales that are double are growing twice as fast as peers; subsidy fears overdone
- iPhone sales up 88% - 35M
- Industry smartphone sales up 42% (per IDC)
- iPhone sales in China up over 500%
- "Churn from iPhone customers is the lowest of any phone they [phone carrier executives] sell in their whole"
- Treatment of Spanish iPhone subsidies a unique situation not reflective of all other markets
iPad: New iPad is a huge success; still unable to fully meet demand
- iPad sales up 151% - 12M
- iPad is still "supply constrained" and "the new iPad is on fire, and we're selling them as fast as we can make them" - similar comments are made quarter after quarter as sales continue to surprise to the upside
- iPod sales down 15% - 7.7M
- Mac sales up 7% - 4M
- Gross Margins up 6% to 47.4% - Far in excess of even the most bullish forecasts
- Approximately 135 basis points of gross margins due to "stronger-than-expected revenue and product mix" - essentially consumers purchased higher-end products
- $110.2B in "Cash Plus"
- $14B Cash Flow from Operations
- Tim Cook on litigation: "I've always hated litigation, and I continue to hate it. We just want people to invent their own stuff".
- R&D Spending up 45% - Tim Cook says "you're going to see a lot more of the kind of innovation that only Apple can deliver"
After digging through the press release the only real bad news I could see is that Mac portable sales were only up two percent year-over-year and revenue actually declined marginally. Since the Mac is not a core engine of growth for Apple I am not overly concerned by this. Furthermore, it is not entirely unexpected as Apple announced that the new operating system will be released in the summer (OS X Mountain Lion). Tim Cook explained the decline by explaining that "I think there was some cannibalization from iPad and the [PC] market is slow."
In closing, just take a step back and let these numbers soak in. iPad sales were up huge because the new iPad was released just ahead of the quarter. While the iPhone 4S in new in some markets it is not masking the fact that this is a six month old phone that is destroying the competition. The company is continuing to hit on all cyclenders and this robust quarter should restore Apple's momentum leading up to the new iPhone and iTV launches later this year.
I support my $720 price target and recommend buying Apple on any dips back below $600 if you have not already taken advantage of the recent selloff.
Sources: All quotes and figures are attributable to the previously cited Seeking Alpha conference call transcript and Apple's press release.
Disclosure: Author is long AAPL, T, VZ, and AAPL May 700 Calls.