No sooner than the Dow closed at its highest level in nearly three years on Wednesday, April 20, than Apple (NASDAQ:AAPL) helped lead the technology sector higher on Thursday. Apple stock rose 2.8% after reporting spectacular fiscal second quarter 2011 profits, boosted by its flagship smart mobile device, the iPhone.
For the quarter, Apple had made a record $6 billion profit, up 95%, and revenue jumped 83% to a record $24.7 billion. iPhone sales more than doubled to 18.7 million, and Mac sales climbed 28% to 3.8 million (see chart).
Chart Source: BusinessWeek
iPad: “The Mother of All Backlogs”
Apple CFO Peter Oppenheimer said in the earnings call that “We sold every iPad 2 that we were able to make this quarter," with what Apple COO Tim Cook referred to as "the mother of all backlogs.” So obviously Apple’s gaining momentum with iPad, and expanding iPhone through additional carriers in new regions and countries, which should bring solid growth in the medium term.
However, the supply chain impact on Apple from Japan’s earthquake, tsunami and nuclear power crisis is the culprit behind the only product line that came in below expectations – iPad. Apple sold 4.7 million units of iPad, vs. analysts’ expectation of 6 million.
Supplies Quickly Secured
The Guardian reported that a shortage of key parts for mobile phones and tablets will affect Nokia (NYSE:NOK), Research In Motion (RIMM) and Sony Ericsson (NYSE:SNE), and that smart phone sales could drop by as much as 5% this year because the Japanese earthquake would seriously affect the supply chain of key components.
According to The Guardian, the key element is a chemical for lithium-ion batteries, used in mobile phones, tablets and laptops. Kureha Corp. (OTC:KUREF), a Japanese company that produces 70% of the world’s supply of that key chemical, had to shut down production after the quake.
Nevertheless, Apple, Samsung (OTC:SSNLF), HTC and China's Huawei are believed to be among the companies that moved quickly to secure supplies from alternative sources in China, Taiwan and Korea, which could give them a substantial advantage over rivals in the next three months.
Apple's Cook revealed in January that the company had committed $3.9 billion to long term component supply contracts over the next two years. CEO Steve Jobs has said that the company's more than $50 billion in cash is reserved for "one or more strategic opportunities in the future."
Tablet & Smart Phone To Outperform PC
The tragedy in Japan, a softer consumer market, and a significant slowdown in Asia Pacific could also lead to weaker unit sales. On that note, tablet and smart phone players like Apple and Motorola (NYSE:MMI) will likely perform better as these factors are expected to present a greater challenge to personal computer (PC) sector players.
Positioned to Take Rivals' Market Share
When in a tight spot -- as with these global technology supply chain problems brought on by the Japan catastrophe -- size, scale and wallet have its advantages. Apple has reportedly become quite aggressive in securing components since the disaster in Japan.
According to Apple Insider, Apple was offering upfront cash payments to suppliers and is willing to absorb all the additional costs arising from Japan-based component makers affected by the massive earthquake, in exchange for "smooth shipments," and more importantly, to block out competitors.
Supply Chain Challenges To Impact Margin
If Apple is able to secure its supply chain, then the company is in a position to possibly grab market share from competitors. Surging demand for its products has led Apple to guide a very bullish 33% revenue increase in the next quarter, to $7.2 billion. But supply chain problems most likely will not go away quickly, and could negatively impact Apple’s margins.
On the other spectrum, as companies like Apple and Samsung are shifting supply chain to other regions near Japan, some Asian companies like Taiwan’s TSMC and UMC could benefit from the business diverted from Japan.
Apple's stock share price has risen 2,300% over the past five years (2-1 stock split on Feb. 28, 2005) with basically non-stoppable momentum significantly outperforming rivals like Google (NASDAQ:GOOG), Microsoft (NASDAQ:MSFT) as well as the broader S&P 500 index (see chart). Apple zipped past Microsoft in March 2010 to become the second-largest in market cap among the S&P 500. (Exxon Mobile (NYSE:XOM) is No. 1.)
From a valuation standpoint, Apple's current stock price implies that investors have high or maybe even unrealistic expectations of Apple. The bigger and more mature a company gets, the more difficult it is to keep coming out with cool and got-to-have products to deliver jaw-dropping sales and revenue numbers quarter after quarter.
Nasdaq 100 Rebalancing in May
Nasdaq exchange operator Nasdaq OMX (NASDAQ:NDAQ) said on Apr. 5 that it is rebalancing its benchmark Nasdaq 100 index by cutting the weighting of some stocks including Apple, while boosting the weight of Microsoft. Apple will continue to remain the largest component of the Nasdaq 100 index.
Apple stock took a hit after the announcement, primarily due to large index funds starting to rebalance portfolios to mimic the Nasdaq 100 holdings. Then the sell-off was basically saved by stellar quarterly earnings.
Once the rebalancing takes effect May 2, the projected weight of Apple will be 12.33% of the index, compared with a current weight of 20.49%. Thus, Apple stock could be under some more selling presure until May or beyond, as index funds continune to reposition their portofolios.
Jobs’ Eventual Departure?
Furthermore, Apple is probably one of the very few major global corporations that are intrinsically linked to one single executive: Steve Jobs. Although Jobs surprised the market by returning to the stage at Apple's iPad 2 event just weeks after his medical leave in mid-January, his health and possible eventual departure is a risk factor to the stock performance that needs to be taken into account.
Becoming a Cash Cow
For now, it seems consumers just can't get enough of Apple's products, and the company's still among the best-in-world-class tech companies. But judging from the recent stock price action, the momentum seems to have waned, lacking an upside catalyst (i.e. brand-new innovations). In other words, Apple appears to be moving from a “Growth” company to a “Cash Cow” phase.
Dividend, Buybabk or Stock Split
In order to boost investment demand, a good move by Apple would be to declare dividends or stock buybacks to increase shareholder returns, since the company obviously is sitting on lots of cash.
In addition, Apple could do another stock split (Apple's had three stock splits in its history); a 6-1 split, for example, would bring the stock price to about $58 levels. At this new price level, it would open up a whole new class of investors, giving the stock some renewed energy and momentum.
Take Profit For Now
Before all that can take place, for now, it seems a logical move for investors to just take some profits after this earnings bump, and wait for the summer selloff for better valuations of Apple and other tech players like Hewlett Packard (NYSE:HPQ) and Cisco (NASDAQ:CSCO).
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.