Unless you were vacationing in a country without Internet access you know that Apple (NASDAQ:AAPL) announced the iPhone 5 last Wednesday, went on sale on Friday and is available this coming Friday, September 21. Overall it is a strong upgrade and the phone's features were in-line with rumors (bigger screen, LTE connectivity, lighter and thinner).
While Apple's June quarter iPhone sales were short of most expectations it appears that we are off to the races for the September and December quarters. The large number of countries that the 5 will be available largely negates the concern that there could be major manufacturing issues with the new in-cell screen technology that allows for a thinner phone.
September quarter results will depend on how may iPhone 5s sold
Apple's September quarter ends on Saturday, September 29, so there could be a decent variability to how many iPhones Apple will have sold in the quarter. Per the company's 10K filings revenue is recognized when delivery has occurred and collection is probable (not an impact since iPhones are pre-paid). For most sales the criteria are met when the product is shipped.
A number of analysts had not included any iPhone 5 sales in their September quarter estimates. Now they seem to be racing to out-forecast each other. I have seen a number of iPhone 5 projections in the 8 to 10 million range (compared to 4 million for the 4S) in the quarter with one estimate at 13 million.
I have also seen a number of analysts estimate that Apple will sell 50 million or more units in the December quarter (which I believe is doable).
One way to take into account the variability is to combine the September and December quarters since the 5 is coming out so late in the quarter. In the short term the stock could go down if Apple announces that it sold less than 8 million units in the first weekend but I believe any disappointment would be temporary.
September quarter estimates and preliminary December quarter
I project that the company could generate $39 billion in revenue and with a higher iPhone mix (30 million iPhones and 47% of total revenue) that gross margins will be higher than expected at 41.5%. I believe the company was extra conservative with guidance since they did not know for sure that the iPhone would announce and launch in the quarter. With the iPhone 5 shipping I believe Apple could generate $10 in EPS for the September quarter and over $15 for the December quarter.
Competitors, what competitors?
Now that isn't entirely correct. The Samsung Galaxy S3 has a superb 4.8 inch display vs. Apple's 5 at 4 inches and some have features that the 5 doesn't have (removable battery, NFC or a lower price). In reality Apple is playing catch-up with the iPhone 5 but keep in mind Apple is very good at catching up (the iPod was launched after many other MP3 players were on the market and tablets have been around in various shapes for over a decade).
However, while Motorola (NASDAQ:GOOG), Nokia (NYSE:NOK) and Samsung announced new phones in the past few weeks almost all of them did not have pricing or availability information. No wonder there seems to be huge demand for the iPhone and the competitors now seem to be playing catch-up.
A 2012 wild card is the iPad Mini
There is a lot of speculation that an iPad mini will be announced in October to compete against the Kindle and other smaller form factor tablets. From people I have talked with and with all the rumors running around I believe it will happen and that it is a positive for the company. I believe it will increase estimates since no one is including it. While a smaller iPad will cannibalize the current one and maybe some iPhones or iPods, it is better to do it to yourself vs. having someone else take share from you.
One of the wild cards is China Mobile
China Mobile has 688 million users and Apple's previous phones were not made to work on its network even though over ten million have hacked their iPhones to access it. If and in reality when Apple strikes a deal with China Mobile it could drive huge volumes for the phone. This may not happen until 2013 but once the consultants tear down an iPhone 5 we should know if it is designed to work on their network.
Apple TV is another wildcard but I don't think it will be a TV or move the financial needle
I believe that the Apple TV will become more of a set-top box solution (I think they should buy TiVo since it is the one device you could not rip out of our house) and that Apple will not offer a TV set. Apple needs to be a player in the largest screen that users have but TVs are a brutally competitive market (translation, low margins) and that people don't replace their TVs on a fast enough cycle.
Can Apple "control" the experience with a set-top type device? I believe it will go that route vs. trying to sell an expensive TV. That could be negative for the shares since a number of analysts and investors believe they will and that it will add enough to positively affect the stock. I'll stay on the side-lines with this and be positively surprised if it happens.
Calendar 2013 estimates and $835 target price
I estimate that Apple can generate $214 billion in calendar 2013 revenue with the iPhone being about half of it and the iPad about a quarter. My calendar 2013 EPS estimate is $60 per share and the company should have almost $200 in cash per share at that time.
If you don't take the cash into account and apply a 14x PE multiple the stock would be $840.
If you use a PE multiple of 13x and only about $50 billion of the almost $200 billion in cash and investments you get an $830 stock price. Take the average of the two and you get $835.
Keep in mind that the calendar 2013 EPS of $60 compares to $35 in 2011 and an estimated $45 in 2012. Yes growth rates have to decrease but the run in the stock is fully supported by the results. And the shares are trading at very reasonable if not downright cheap valuation levels given the growth rates.
One (of many) risks is who will be the incremental buyers of the shares
Apple makes up almost 5% of the S&P 500. There are many funds that either can't or don't want to have one company's stock be over 5% of their portfolio. This could cause a problem especially if the stock continues to rise significantly faster than the market as these portfolio managers will be kept from buying additional shares.
And the law of large numbers will eventually catch up with them and cause a tremendous deceleration in growth rates. This could happen by the December quarter of this year since it is a very tough comparison to last year's December quarter but with if the 5's launch is as strong as initially initiated it may not be until late next year.
Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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