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Equity Research Analyst and Portfolio Manager with extensive experience identifying investment opportunities with favorable risk/reward characteristics across multiple industries. Generated investment ideas for and managed Global, International and U.S focused portfolios. Significant experience... More
  • Apple: Earnings “Miss” Is a Buying Opportunity in front of Massive iPhone 4S Demand and an Exciting Product Pipeline 0 comments
    Oct 19, 2011 10:47 AM | about stocks: AAPL

    Apple announced its fiscal fourth quarter earnings on October 18.  The market is disappointed in the result and the stock is trading down ~5% to the $400 per share level.

    Before earnings I wrote an article suggesting that investors should be focused more on the color for the coming holiday quarter, versus the actual Q4 results.

    First, let’s look at the results.

    Fiscal Q4 Results vs Company Guidance and Wall Street Analyst Consensus Estimates

     

    Q4 Results

    Company Guidance

    Wall Street Consensus

    Revenue

    $28.27

    $25.00

    $29.60

    EPS

    $7.05

    $5.50

    $7.349

     

    In summary, Apple beat their own guidance easily, but did not meet the expectation of the collective group of Wall Street analyst.

    Second, let’s consider the current valuation at $400 per share.

    At $400 per share Apple’s market capitalization is $396 billion.  The company now has $81.6 billion of cash on its balance sheet equal to over $86.50 per share.  Consensus EPS for fiscal 2012 is $34.185 per share, but this number is likely to be revised upwards as analyst consider the shift of iPhone sales out of the quarter just ended and into 2012.   However, using this number Apple is trading at 11.7x 2012 earnings, and only 9.3x if you take out the cash (once analysts post revised numbers these multiples will be even lower).  While Q4 results missed the consensus estimate, revenue still increased 39% year over year and EPS increased 52%.  52% EPS growth is not usually associated with a company trading at a 10x earnings multiple.  

    Third, let’s look at what was said in the conference call about the future of the company.  

    Regarding the launch of the iPhone 4S:

    “We've gotten off to a great start with the 4S. We've sold over four million in just three days after launch. We're thrilled with the start that we have.” - Tim Cook

     “We are very confident that we will set an all-time record in the December quarter for iPhone sales. We – in our wildest dreams we couldn't have gotten off to a start as great as we have on the 4S.” - Tim Cook

    “We would expect to establish new company records for both the iPhone and the iPad in the December quarter. These are fantastic products and the momentum here is tremendous. And for Macs we would expect to outgrow the market on a year-over-year basis and report to you our 23rd consecutive quarter of outgrowing the market.” – Peter Oppenheimer

    Regarding the product pipeline:

     “As we look forward we are going to just continue to offer the very best products to customers that we can. We are going to be extremely innovative. We're very confident, excited about what's in the product pipeline.” – Peter Oppenheimer

     

    “We've had a series of unbelievable products, we believe the best products in the world, and our customers tell us that, which is more importantly than us saying it. And we've got a pipeline that's unbelievable.” – Tim Cook

     

    “We see the tablet market as a huge market. And we could not be happier with our position in it, and we've got some fantastic things in the pipeline. And after selling 40 million in the first 18 months, which is more than our wildest dreams were and selling three out of every four, I think we've got a fairly good handle on what to do next.” – Tim Cook

     

    These final few quotes beg the question as to what is in the product pipeline.  iPad 3 springs to mind as does an iPhone 5.  What about a TV product or other ideas that we cannot predict?

     

    My take-aways from the September quarterly results are the following:

     

    ·         Growth remained strong even with iPhone sales slowing in the last few weeks of the quarter as the “new” iPhone release grew near and consumer delayed purchases

    ·         Despite the rumors, when the price of the iPhone 4 was reduced to $99, they sold almost 3mm to-date in the first quarter suggesting that the new price points will drive more sales to consumers who previously looked to cheaper Andriod handsets

    ·         Increases in Mac sales to record levels suggest the ecosystem concept works and with iCloud up and running consumers with iPhones and/or iPads who do not have Macs could drive further Mac growth. 

    ·         iPad sales, while disappointing based on extremely lofty expectations were still a record and the iPad is clearly entering the enterprise space, which will fuel growth

    ·         The December quarter (fiscal Q1 2012) should be a blow-out quarter, with iPhone 4S sales eclipsing management expectations.  Note that management guidance for Q1 2012 surpassed consensus guidance, which is extremely rare.

     

    Buying Apple on this pull-back should pay off handsomely when Apple reports its Q1 2012 earnings in January 2012.



    Disclosure: I am long AAPL.
    Stocks: AAPL
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