Apple (AAPL) - All In
This article presents our rationale why Apple shares now present an entry opportunity, for profitable returns, not seen since December of 2011. The article includes an assessment for a substantial top line and bottom line beat in the upcoming earnings release on Jan 23rd, where it seems reasonable that the share price will break through the double bottom base pivot at ~$595 for a new breakout post earnings.
A combination of several factors has put pressure on AAPL shares since September, 2012.
· Year-end selling to retain the 2012 tax levels on profits
· Tax loss selling for those that rode the stock down
· Shorts piling on tax based sellers
· Supplier "checks" by several sell side analyst firms
· Various operational concerns raised by many of the same sell side analysts, such as cannibalization of iPad by iPad-Mini, supply constraints for iPhone 5 and iPad-Mini, soft demand for iPad in FQ4/'12, pricing of iPad-Mini being too high and concerns about Apple losing its mojo with the passing of Steve Jobs.
While many of the concerns have been addressed well in previous articles, I'll just mention several additional points mitigating some of these:
iPad cannibalization by iPad Mini - While iPad-Mini is rolling off the shelves in China and other lower income geographies, indications are that Mini will not exceed 25%-30% of the total, as hinted to by theanalysis published by Localytics
iPad-Mini pricing - Despite such pricing - numerous reports have since suggested that iPad-Mini can't be manufactured fast enough, and that it is a major hit in China
Supply constraints - since late November, deliveries on iPhone 5 were from stock and iPad-Minis were for delivery within 1 week.
The analysis here will focus on 2 areas:
1. Supply "checks" vs. demand-side projection
2. The company's projected performance this quarter, based on its historic performance
There are additional important considerations regarding the relative strength of AAPL's P/E and PEG (P/E to Growth), as compared to AMZN, GOOG, QCOM, which we will not address here.
While you never really know, and risks remain, AAPL now seems to present an unprecedented entry opportunity for very substantial gains, in the short, mid and long term, and may be one of those rare opportunities one gets, for an "all-in" investment. The "all-in" is used as a metaphor, and not as an actual recommendation. Please perform your own risk/reward assessments for any allocation of your investments into Apple.
Supply checks vs. demand-side data
All the projections used as rationale for estimate reductions were a result of what the sell-side analysis call "supply chain checks".
What are these checks? As a Taiwanese or Japanese supplier to Apple, what would the motivation be to provide accurate information? Besides breaching confidentiality agreements with Apple and risking its business, the only thing such a supplier might benefit from is if, as a result of their information, the stock swoons, and they can pick it up cheaply. Why in the world would the suppliers care about accountability, and why are sell side analysts willing to bet their projections on such illegal info sharing? makes you wonder…
We are all better off relying on demand side information than this questionable supply side "data" which even if accurate is limited at best - since AAPL continuously modifies its supply chain and does on-going supplier adjustments for what is probably the best Just-In-Time (JIT) product manufacturing process on the planet.
So what does demand side data show for the December quarter?
AT&T smartphone sales bode well for AAPL from 1/8/13
Apple steals throne from Android from 1/7/13
Large iPad - the preferred tablet for enterprises from 1/7/13
As a matter of fact, between January and July of 2011, Apple reported that 5 billion app download took place, which equates to 830 millions download per month. In 2012, 20 billion downloads took place over the 12 months, equating to 1.67 billions download per month - so downloads are increasing, and with it monetization for Apple and its developer eco-system
Largest number of iPhones ever - 2M, sold in China over opening week-end - from 12/16/12
Morgan Stanley's Katy Huberty on Customer Demand for iPhone and iPad - from 12/17/12
Apple's iPhone takes 68.2% of new small & medium business smartphone activations - from 12/19/12
Record AT&T smartphone sales bode well for iPhone - from 12/5/12
IBM: Apple's iOS dominated holiday shopping, 330% greater than Android - from 11/25/12
Hardly indications of a company in decline or stagnation, but rather a continued very high growth player and a very successful potential FQ1/'13.
History of projections vs achievements
Given the strong demand-side indications, the excessive bearish sentiment and the larger short interest since mid-November 2012, we project rapid ramp-up for the stock, post earnings, resulting from a massive revenue and EPS beat for AAPL in this FQ1, 2013, as can be seen in the leftmost column - with revenues of $61.48B, 58 million iPhones sold and 26 million iPads, of which 10 million are projected to be iPad-Minis. ASP's for the phone and tablet, include accessories.
Of the $61B+ in revenues - $37.7B will be from iPhone sales, $11.78B from iPad sales and $12B from other revenue.
Enclosed below is a table showing 11 quarters worth of data, including:
· Actual, company projected and analyst consensus on revenues
· Actual, company projected and analyst consensus on EPS
· Over(or under) achievement vs. company projection and analyst consensus on both revenues and EPS
· Gross margins - actual and projected
· Unit sales of iPhone, iPad, MAC, iPod
· iPhone and iPad quarterly revenues and ASP's
· Year over year (YoY) growth for revenues EPS and unit counts
Given the pent up demand held back in FQ4/'12 for iPad and iPhone, due to imminent releases of iPhone 5 and iPad Mini - expectations are for a large "make-up" for that pent-up demand, like we saw in FQ1/'12, after the release of the iPhone 4S. We are therefore projecting YoY iPhone unit growth in FQ1'13 of 57, in line with FQ4/12 YoY growth - resulting in 58 million units. Similarly, based on demand indications as outlined above we are projecting a 69% YoY unit growth in iPads, resulting in 26 million units.
These numbers drive a revenue over-achievement relative to company projection, of 18.2% - within the range seen in FQ1/'12 (25.2%) and FQ1/'11 (16.3%).
EPS over-achievement relative to company projection, is 24.3% - lower than seen in FQ1/'12 (49.1%) and FQ1/'11 (34%).
12/12 | 9/12 | 6/12 | 3/12 | 12/11 | 9/11 | 6/11 | 3/11 | 12/10 | 9/10 | 6/10 | |
FQ1/'13 | FQ4/'12 | FQ3/'12 | FQ2/12 | FQ1/'12 | FQ4/'11 | FQ3/'11 | FQ2/'11 | FQ1/'11 | FQ4/'10 | FQ3/'10 | |
Rev ($B) | 61.48 | 35.97 | 35.02 | 39.19 | 46.33 | 28.27 | 28.57 | 24.67 | 26.74 | 20.34 | 15.70 |
Proj Rev ($B) | 52.00 | 34.00 | 34.00 | 32.50 | 37.00 | 25.00 | 23.00 | 22.00 | 23.00 | 18.00 | 13.40 |
Rev OvrAchv(%) | 18.2% | 5.8% | 3.0% | 20.6% | 25.2% | 13.1% | 24.2% | 12.1% | 16.3% | 13.0% | 17.2% |
Rev Cons ($B) | 54.58 | 36.40 | 37.30 | 36.30 | 38.70 | 29.20 | 24.80 | 23.30 | 23.80 | 18.40 | 14.60 |
Rev Cons Ovr(%) | 12.6% | -1.2% | -6.1% | 8.0% | 19.7% | -3.2% | 15.2% | 5.9% | 12.4% | 10.5% | 7.5% |
EPS ($) | 14.61 | 8.67 | 9.32 | 12.30 | 13.87 | 7.05 | 7.79 | 6.40 | 6.43 | 4.64 | 3.51 |
Proj EPS ($) | 11.75 | 7.65 | 8.68 | 8.50 | 9.30 | 5.50 | 5.03 | 4.90 | 4.80 | 3.44 | 2.39 |
EPS OvrAchv(%) | 24.3% | 13.3% | 7.4% | 44.7% | 49.1% | 28.2% | 54.9% | 30.6% | 34.0% | 34.9 | 46.9% |
EPS Cons ($)] | 13.33 | 8.75 | 10.35 | 10.03 | 9.79 | 7.31 | 5.81 | 5.35 | 5.38 | 4.05 | 3.08 |
EPS Cons Ovr (%) | 9.6% | -0.9% | -10.0% | 22.6% | 41.7% | -3.6% | 34.1% | 19.6% | 19.5% | 14.6% | 14.0% |
Net Profit ($B) | 13.53 | 8.22 | 8.82 | 11.62 | 13.06 | 6.62 | 7.31 | 5.99 | 6.00 | 4.31 | 3.25 |
GM(%) | 38.5% | 40.0% | 42.8% | 47.4% | 44.7% | 40.3% | 41.7% | 41.4% | 38.5% | 36.9% | 39.1% |
Proj GM (%) | 36.0% | 38.5% | 41.5% | 42.0% | 40.0% | 38.0% | 38.0% | 38.5% | 36.0% | ||
iPhones (M) | 58.00 | 26.90 | 26.00 | 35.10 | 37.04 | 17.07 | 20.34 | 18.65 | 16.24 | 14.11 | 8.40 |
YoY growth (%) | 57% | 58% | 28% | 88% | 128% | 21% | 142% | ||||
IPhone Rev ($B) | 37.70 | 17.10 | 16.20 | 22.70 | 24.40 | 11.00 | 13.30 | 12.30 | 10.47 | 8.00 | 5.30 |
IPhone ASP ($) | 650.00 | 635.69 | 623.08 | 646.72 | 658.75 | 644.41 | 653.88 | 659.52 | 644.70 | 566.97 | 630.95 |
iPad | 26.00 | 14.00 | 17.00 | 11.80 | 15.43 | 11.12 | 9.25 | 4.69 | 7.33 | 4.19 | 3.27 |
YoY growth (%) | 69% | 26% | 84% | 152% | 111% | 165% | 183% | ||||
IPad Rev ($B) | 11.78 | 7.50 | 9.20 | 6.60 | 9.10 | 6.90 | 6.00 | 2.80 | 4.61 | 2.80 | 2.20 |
IPad ASP ($) | 453.08 | 535.71 | 541.18 | 559.32 | 589.76 | 620.50 | 648.65 | 597.01 | 628.92 | 668.26 | 672.78 |
MAC | 5.00 | 4.90 | 4.00 | 4.00 | 5.20 | 4.89 | 3.95 | 3.76 | 4.13 | 3.89 | 3.47 |
iPod | 11.00 | 5.30 | 6.80 | 7.70 | 15.40 | 6.62 | 7.54 | 9.02 | 19.45 | 9.05 | 9.41 |
Other Rev ($B) | 12.00 | 11.37 | 9.62 | 9.89 | 12.83 | 10.37 | 9.27 | 9.57 | 11.66 | 9.54 | 8.20 |
iPad-mini | 9/12-iPh 5 | iPad 3 | 10/4 - iP4S | 1st Q closed | iPad2 | iPhone 4 | |||||
Events | iPad 4 | 10/12-Icloud | by Cook | ||||||||
Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: My long position in AAPL is using mid-term call-option bull spreads
Disclosure: I am long AAPL.
Additional disclosure: Using mid-term options