Apple (AAPL) released its second quarter fiscal year earnings results on April 24. According to Peter Oppenheimer, Apple Senior Vice President and CFO, Apple enjoyed the highest March quarter earnings and revenues ever reported for the firm, and the second highest quarterly earnings reported for any quarter, with earnings per share of $12.30. Apple attributed these gains to record sales on all three of its devices, the iPhone, iPad, and Mac. In the conference call, Oppenheimer noted that demand on Macs was strong enough that Apple's channel inventory was reduced to between three and four weeks. The company maintains a target range of four to five weeks inventory on the Mac.
Countering some analyst calls for market saturation, in its latest conference call Apple noted that demand in non-traditional markets for its products remains strong. The company is receiving orders from school districts, construction companies, and the United States Air Force for iPads for use in everything from publications access to supply tracking.
Trouncing the Competition
Apple iPhone rival HTC Corporation released its numbers earlier in April, and the numbers were not positive, with a 70% drop in revenue from a quarter before. To me this suggests that HTC's Android-driven phones (the Android OS is a Google (GOOG) product) enjoyed a previous quarter buoyed by holiday sales, but could not entice buyers into purchasing the phones for themselves. HTC CEO Peter Chou suggested that most of the drop was due to buyers choosing the iPhone 4S.
If this is true, and in my opinion it does at least partially account for HTC's struggling sales, HTC should be worried. The iPhone 4S is not going to lose its novelty factor until Apple releases the next version, which it eventually will, and if the new phones that contributed to HTC's first quarter numbers can't compete with the iPhone, there's little reason to believe that HTC's next round of handsets will fare any better. The HTC One series, which hit shelves in April, has received good reviews from some of the top device authorities. However, HTC smartphones rely on Google Play for apps, which as many have noted has improved since its rebranding from Android Market, but is still not as comprehensive or cost conscious as the Apple iTunes store.
Competitor Nokia (NOK) also reported a quarterly drop in sales, down to 12 million smartphones compared to 24 million a year earlier, showing that smartphones with Windows OS are not faring much better than smartphones operating on Android. According to its earnings report, Nokia sold fewer mobile devices in the first quarter of 2012 compared to the first quarter of 2011 in every single market. The biggest drops were in North America, which saw a 50% reduction, and China, which saw an even more concerning 62% reduction. In its report, Nokia indicated that these drops were due to a variety of factors. Without specifically naming competitors, it indicated the competitive environment was partly responsible, noted that distributors and operators reduced their inventories of Nokia phones, and its own lack of full touch devices.
Telecommunications carriers Verizon (VZ) and AT&T (T) are supporting the efforts of Microsoft (MSFT) and Google to supplant the iPhone. Since both carriers offer the iPhone with substantial rebates for new and renewed contracts, neither is making as much profit off of new activations as some might expect. In my opinion, the profit drive from these devices mostly benefits Apple, through consumers who upgrade to new iPhones out of contract and consumers who are using the iTunes store for apps and media.
Apple stock is charging forward on the strength of its earnings report, currently trading around $610, up from a previous 24 hour high of $564. At $610, Apple has a price to book of 6.3 and a forward price to earnings of 12.0. The industry averages on these markers are 5.1 and 14.3, respectively. This makes Apple a reasonable value based on past performance and future expectations.
Microsoft is currently trading around $32, with a price to book of 3.9 and a forward price to earnings of 10.6. Given the industry averages and Microsoft's strong track record, this makes Microsoft an appealing buy, though little of the attraction derives from Windows OS handsets. Windows driven smartphones dropped from a 12% market share in 2007 to 11% in 2011, compared to Apple's leap from 2.7% to 19%. The same numbers reveal that Android made an even greater leap, from a 0% market share in 2007 to 39% in 2011. Android designer Google is currently trading around $609, with a price to book of 3.4 and a forward price to earnings of 12.0.
As noted above, device maker Nokia is struggling. Analysts are attributing its slide at least in part on its rush to Windows OS, which has been slow to take off. However, Nokia's previous OS Symbian was not performing well: From 2007 to 2011 its market share dropped from a dominating 64% to just 19% in 2011. Nokia is currently trading around $4 per share, and even at that level its forward price to earnings is a whopping 31.3, though its price to book is a meager 1.0. With the device maker's current outlook, this spells trouble for its current leadership and its future as a company.
Certainly, Apple is benefiting from the actions of some of its competitors. Microsoft and Google are paving the way for cloud-based computing for everyone, which makes it easier for Apple to sell its own brand-limited cloud products. I think that given Apple's history of innovation and the "hot" factor, which is difficult to quantify but pervades all of Apple's products, Apple has a strong base for continuing to dominate the portable devices market.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.