The Myth Of iPhone Seasonality

Jun.26.12 | About: Apple Inc. (AAPL)

Finding Apple's window of opportunity within the context of a stalled global economy remains the best strategy on Wall Street. In the face of relentless economic opposition over the past five years, Apple has continued to defy the odds by surpassing earnings expectations quarter after quarter. The hot trend among Apple analysts is to reduce iPhone forecasts in the current quarter because of seasonality. The collective reasoning is the same, how can Apple grow iPhone sales in an environment that includes both European weakness and an iPhone 5 launch later this year? Well, in response to these analysts we recommend looking at the numbers.

In terms of headwinds, there was no quarter as bad as the June quarter of last year. Consumers were expecting the iPhone 5 to be announced at the WWDC on June 7th but it was delayed. This unexpected dynamic should have resulted in a terrible earnings report assuming the logic that iPhone sales slow down in the months leading up to a launch. The bearish analysts were ready for a major Apple disappointment. Do you remember what kind of a quarter Apple announced? The company sold 20.34 million iPhones representing 142% unit growth year-over-year. And don't forget, the European situation was even worse in 2011 than it is in 2012. The iPhone 4, having been available for an entire year, was still able to crush expectations. If Apple was able to produce those kinds of numbers last year, what should we expect this year considering the iPhone 4S has only been available for 9 months in the U.S. and less than 6 months in China? Before we answer that, also consider that the bearish analysts of this quarter were wrong last quarter when they predicted 25-29 million units. Apple blew them away with 35.1 million units, beating our Economic Timing estimate by a mere 100,000. So what's it going to be this quarter?

One again the hot iPhone number among analysts is under 30 million units as referenced by Sterne Agee's Shaw Wu at 26-28 million and Canaccard projection of 29 million units. For those who don't believe in the myth of iPhone seasonality, the expected number is much higher. One year ago the iPhone grew 9% sequentially despite its headwinds. The same 9% sequential growth would result in current quarter sales of 38.26 million units. Even more important than last years sequential growth is the calculation of recent year over year growth. During the March quarter the iPhone grew 88% year over year. In the December quarter the iPhone grew 128% year over year. If we assume low end growth of 88% year over year, current quarter sales would come in at 38.23 million units. According to historical precedent, 38 million is the magical number for the June quarter.

Why are the analysts so far off? We think it's because they give too much credit to the economy, too much credit to U.S. sales, too much credit to skewed supply chain data and not enough credit to the installed user base replacement cycle and global demand. In past quarters the iPhone has proven that seasonal weakness is a myth and we think the current quarter will confirm the theory. This kind of precedent is what drives hedge funds to invest in the Apple pre-earnings runs. Remember that European volatility goes both ways. Don't make the mistake of selling on a down day. Europe isn't going to fall off a cliff. It's too big to fail. At this point in the game it pays to be patient after loading up at June lows.

Disclosure: I am long AAPL.