Apple’s Momentum Will Continue

I have written extensively on the iPhone. You can find them under the iPhone and the Future series as well as the iPhone’s Component Ecosystem series. My last post on Apple (NASDAQ: AAPL) was just a month after the release of iPhone. A month or so later on September 5, it announced a $200 reduction in the price of the 8GB model. The 4GB model has been discontinued. For its early iPhone customers, it is offering a $100 store credit for buying Apple products at its stores. The announcement was met with mixed reactions.

Soon after on September 10, it reached the milestone of 1 million iPhone sales. It started selling iPhones in the U.K. and Germany on November 9, partnering with O2 in the U.K., and with T-Mobile in Germany. It will start selling the iPhones in France from November 29th, partnering with Orange. [I have covered the iPhone’s impact on the U.S. carriers in some detail before.]

Its price is £269 ($567) in the U.K. Though this is cheaper than its launch price in the U.S. in June, it is much higher than the current U.S. price of $399. In Germany, the price is even more: €399 ($585). Early reports show that the response was not as overwhelming as in the U.S. (They are probably waiting for a price reduction as well.)

Apple posted its earnings for the fourth quarter recently on October 22. As per the release, iPhone sales for the quarter were 1,119,000, bringing the total iPhone sales in 2007 to 1,389,000. Total revenue from the sales of iPhones, iPhone accessories, and payments from AT&T was $118 million.

Total revenue for the quarter was $6.22 billion, up 28.5% y-o-y and 15% sequentially driven mainly by record Mac sales and the strong demand for iPods. Its net quarterly profit was $904 million, or $1.01 per diluted share, compared to $542 million, or $.62 per diluted share in the year-ago quarter. The company's gross margin was 33.6 percent, up 29.2% y-o-y.

Apple shipped a record 2,164,000 Macs, reflecting a 34% y-o-y growth. It sold 10,200,000 iPods during the quarter, up 17% y-o-y.

For fiscal 2007, revenue was $24 billion and net income was $3.5 billion. For the first quarter of fiscal 2008, Apple expects revenue to be around $9.2 billion, and earnings per diluted share of around $1.42. Its stock is trading around $166 after hitting a 52-week high of $192.67 on November 7, and its market cap is around $145 billion.

So what is the outlook for the foreseeable future? Mac Sales will continue to gain momentum, I think, given that the Apple brand is getting such visibility across the iPhone, and the iPod. Also, the much anticipated Vista, Microsoft’s new OS, is now in the market, and will be for the next decade, probably, and is not a very good Operating System. It is quite possible, that this will be decade of Apple establishing itself in the PC business once again.

Furthermore, iPod’s international potential has still not been explored. With the growing wealth in volume markets like India and China, it is likely that the iPod’s momentum will continue.

Finally, the iPhone’s early numbers are good. The product will get better with iterations, and the convergence device movement is more than real right now, and the smartphone market is steaming hot.

In summary, Apple has three businesses, all of which, in my opinion, will continue to grow well. If you believe that, then Apple is still a growth stock.

click to enlarge

Comments

[Malkiel:]

Alas, it avails nothing to be a growth stock at the beginning of a 3-year recession; even the best stocks can't trend upward in price against a stream of selling, and as economic conditions deteriorate even Apple's sales will be affected by weakened consumer spending. Anyone who buys apple stock today will be staring at the same share prices at this time next year, no matter how good a story the company may be...

2007 Nov 20 10:25 AM

[Tom B:]

I agree that a recession is likely, but I think Apple will have some protection. Computer sales may prove somewhat recession-resistant, since you can't do much of anything without one, these days.

2007 Nov 20 10:44 AM

[Jeremy F:]

The bears are out in full force lately. Please put your money where your mouth is and sell AAPL and then sell AAPL short for the next several months to help drop that price down some more. If all you doom and gloom guys actually ACTED on what you say I would be able to pick up more shares at a much better price. Of course if you all did that then you be kicking yourself once it rockets back up over $200...

2007 Nov 20 10:57 AM

[sane_man:]

Indians and Chinese may buy alternative cheap MP3 players in the market instead of the expensive ipods. iphone is a flop in Europe and will be a bigger flop in Asia. In Europe, Vodafone is giving Nokia N80 free. BTW, N80 has better rating than iphone in CNET review. Apple is making money now on PCs. PC market is undergoing an upturn as evidenced by the result of HP. Otherwise, iphone is a flop outside US and ipod market is saturating. This stock is up on momentum and will go down once the momentum wanes.

2007 Nov 20 10:40 AM

[Tom B:]

1) "sane_man"? Can we take a vote?
2) Other MP3 players don't sell because they aren't really comparable
3) It's early days for the iPhone in Europe. I think it'll actually do better PER CAPITA in Europe when things really get rolling.
4) Yea, recession is coming. 3 YEARS? Who knows? But I think people still need computers.
5) "PC market is undergoing an upturn as evidenced by the result of HP" I think you are right. This should benefit Apple.

2007 Nov 20 10:52 AM

[Jesus Phone:]

Dear Insane_man,

You are in such denial... Give me some statistics as to how iPHONE is a FLOP in Europe you putz! Name one other phone released in 10 years that sold as many phones as Apple did in the UK on day 1? Please tell me one single phone since the invention of the telephone that people waited in lines for... (even if they may have been staged / small lines).

FLOP?! You are insane... So what if the N80 has better reviews from CNET. Doesn't make it better because one website says so. I haven't seen a single person her in LA with a Nokia N80... Since the IPHONE was released 5 of my co-workers and a half dozen of my friends bought and IPHONE... The only reason I haven't yet is because I'm stuck with a Verizon contract thru July 2008... and I'm hoping by the time IPHONE 2.0 or atleast a 16GB iphone will be released.

IPHONE is the most desirable phone in the world... not everyone will buy it right away... just like not everyone owns a BMW or LEXUS... but everyone lusts and wants one and when they can afford it they buy it.

Apple's slowly growing it's marketshare.. it doesn't want to make it's phone a cheap commodity.. it wants to keep the iPHONE a luxury item and when they saturate the luxury market.. they'll make cheaper IPHONE nanos and such for the less afluent market.

the mementum isn't waning.. that's where you have it all wrong.. the momentum can't be stopped.. it's like a runaway freight train... get on or get run over.

2007 Nov 20 05:50 PM

[Tom B:]

"The only reason I haven't yet is because I'm stuck with a Verizon contract thru July"

My wife keeps me on Verizon--ughh!. I WILL buy a "touch" someday, though.

Note: spotted two iPhones ON MY STREET in July/August. These guys are not, like, "crazy Mac zealots", like me-- they are regular folk. I feel very bullish.

2007 Nov 20 11:54 PM

[Jesus Phone:]

Dear Insane_man,

You are in such denial... Give me some statistics as to how iPHONE is a FLOP in Europe you putz! Name one other phone released in 10 years that sold as many phones as Apple did in the UK on day 1? Please tell me one single phone since the invention of the telephone that people waited in lines for... (even if they may have been staged / small lines).

FLOP?! You are insane... So what if the N80 has better reviews from CNET. Doesn't make it better because one website says so. I haven't seen a single person her in LA with a Nokia N80... Since the IPHONE was released 5 of my co-workers and a half dozen of my friends bought and IPHONE... The only reason I haven't yet is because I'm stuck with a Verizon contract thru July 2008... and I'm hoping by the time IPHONE 2.0 or atleast a 16GB iphone will be released.

IPHONE is the most desirable phone in the world... not everyone will buy it right away... just like not everyone owns a BMW or LEXUS... but everyone lusts and wants one and when they can afford it they buy it.

Apple's slowly growing it's marketshare.. it doesn't want to make it's phone a cheap commodity.. it wants to keep the iPHONE a luxury item and when they saturate the luxury market.. they'll make cheaper IPHONE nanos and such for the less afluent market.

the mementum isn't waning.. that's where you have it all wrong.. the momentum can't be stopped.. it's like a runaway freight train... get on or get run over.

2007 Nov 20 05:50 PM

[Andrea Di S...:]

"Its price is £269 ($567) in the U.K. Though this is cheaper than its launch price in the U.S. in June, it is much higher than the current U.S. price of $399. In Germany, the price is even more: €399 ($585). Early reports show that the response was not as overwhelming as in the U.S. (They are probably waiting for a price reduction as well.)"

In my opinion all European customers are not waiting for a price reduction but for a 3G capable model.

There have been rumors of a 3G model in June 2008 from Spain Telefonica ... so ...

2007 Nov 20 10:47 AM

[peter02l:]

If you consider the VAT, then the UK price is only about $70 more than the US price.
I don't know what the point of this article is. It throws a bunch of numbers around and then says if you believe them, Apple is a growth stock.

2007 Nov 20 11:21 AM

[peter02l:]

If you consider the VAT, then the UK price is only about $70 more than the US price.
I don't know what the point of this article is. It throws a bunch of numbers around and then says if you believe them, Apple is a growth stock.

2007 Nov 20 11:21 AM

[jswede:]

1) this stock, in the end, is ALL ABOUT THE MAC gaining marketshare

2) I agree with Andrea and previous poster that the Euros are waiting for a) price reduction and b) 3G. I'm in the US and I'm wating for 3G before I buy (though I bought one for my wife altready).

2007 Nov 20 11:34 AM

[Duff:]

"Total revenue from the sales of iPhones, iPhone accessories, and payments from AT&T was $118 million."

-That line can't be Iphone revenue then avg s/p would be sub $105...
it's probably revenue from AT&T and any other "partners"
that are willing to pay Apple for the right to be on the device..

2007 Nov 21 11:31 AM

[bobringer:]

Duff...

Apple books revenues from the iPhone and AppleTV equally over 8 quarters. They only booked 1/8th of iPhone sales in the last quarter. That $118 Million is a number that will be added to revenues for the next 7 quarters (based on last quarters sales).

2007 Nov 24 07:23 PM

[jonreagan:]

Proof again that no company or issue inspires as much debate and emotion as AAPL. Not much additional can be said, except that:
1) While the original article is very good, it really didn't adequately explore the tie-in revenue streams (iTunes, AT&T) which are both sizable and extremely lucrative. Perhaps a follow-up article could focus on these, and their potential impact on Apple's 2008 earnings. Not easy, given that the company doesn't divulge that much.
2) Markets tend to be irrational, and this one is no exception. While I'm not one of these folks that tries to blame all negative trends on "the media", I did endure an hour of CNBC this morning, as people gushed over whether "today would be THE DAY". I finally determined that they were discussing the possibility that oil would hit $100. Yes, I'm serious. It was like the old movies where people gather on the sidewalk, waiting to see if some poor slob is going to jump off the ledge 30 stories up.
3) We need some economists to weigh in....because a recession is by no means certain. When earnings for the S&P 500 and Nasdaq are tallied for the 3rd Quarter, it appears the results will be close to a 5% increase. You would never know it from the wailing and moaning of the last two months; companies like CAT and CMI reported record earnings, but got punished for missing estimates. Performances in the Tech sector were fairly impressive as well (INTC, AAPL, RIMM, HPQ).
4) Fundamentals are not sensational, but are basically sound; an additional rate cut is neither assured nor necessary, and could obviously be counter-productive. The people who mis-managed our leading financial institutions are squealing like stuck pigs (pigs being the operative word). They may even have to forego their end-of-year bonuses...but somehow, I doubt it.

2007 Nov 21 03:03 PM

[brewer:]

The only time I ever think about sellling mine, I end up hanging on to it, and then the next day or two it rockets way back up. It would be hard to set a stop loss, because of the variability, but when you smooth that line, it's VERY agressively UP.

Apple simply has no rival in computer OS'es (Microsoft has only copied them badly, and built in a lot of leverage/monopoly based ties for the corporate entities). MS has never been able to compete on tech, only on business, but this is backfiring as the hardware gets so good lately. (Everyone can afford decent hardware now, it's kind of a shame to run such ugly software on it!) As far as iPods go, there hasn't been one other competitor that can even make a cheap knock off that would sell. The overal investment is way less than in the computer market (even still) and so many people can afford to have the best there is when it comes to 'MP3 players' or phones. Why should they settle for crap when they are only going to save maybe $20???

iPod is like kleenex or band-aid, it just sounds stupid to even say 'MP3 player' as if you are talking about some generic giveaway item, which usually, you are when you can't say "iPod."

I think Apple will have the sense to open the iPhone too, before the google phone can manage to come to life. They might even open the OS at some point. For the cost of the MS software (boxed) they could do it and still make about as much as they are now making selling the hardware.

2007 Nov 21 03:32 PM

[Ghillo:]

The iPhone has done quite well in US, but let's not forget the marketing exposure it had, nothing ever seen on earth. I don't know how, but Apple gets to get most of the journalist on leash, loyal and supporting, they must have invested in stocks I guess.
People don't even see the monopoly that Apple is pushing through iTunes/iPod/iPhone, all locked one with the other one and with proprietary formats that nobody else can use. This point alone would be used to destroy any other company, but with Apple? Naa, they look good. Don't tell me iPods are better because there are tenths of devices now that are ahead.
Vista could be a flop, but I bet people would rather stay with Win XP that buy a Mac. Have you tried to upgrade the RAM? Prices like 5/10 times higher than the equivalent for PCs.
Apple is gaining on the luxury market. They will never be a mainstream product, and iPod will loose ground as new devices appear and DRMs are dropped.
So I would say the momentum will end up in 2008.
Also I don't know much about Sramana Mitra, but the comment she made on European customers "They are probably waiting for a price reduction as well" reveals she is totally pro-Apple! She had to find a justification to the European flop! Maybe Europeans are just less influenced by the marketing done in US, have you thought about that?

2007 Nov 21 06:34 PM