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October 19, 2010
Ignore the Apple Worries, Operating Mometum Remains Impressive
Apple reported another strong quarter but the stock sold off due to concerns about guidance for the December quarter and disappointment in iPad sales. The guidance issue relates solely to gross margins, which Apple guided to 36%, well below recent quarters that have averaged about 40%. The company attributed the guidance to mix issues. iPhones and iPads have lower margins and are becoming a larger and larger portion of total product sales. I find analyst concern on gross margins a bit absurd since these are the same analysts who used to complain that Apple charged too much for their products. Now, Apple is aggressively pricing iPhones and iPads with incredibly rich features, way more than competitors, and the analysts complain even as unit sales blow away expectations. After all, revenue in the just reported quarter beat estimates by about $1.5 billion.
On supposedly disappointing iPad, sales, Apple made it very clear that they sold as many as they could manufacture and that demand for iPads is unprecedented. The expansion of iPads to AT&T and Verizon stores and Target and Wal-Mart clearly signals that supply constraints have eased. Apple will sell as many iPads in the December holiday quarter as they can manufacture.
The stock remains attractive, especially after adjusting for $55 per share in cash on the balance sheet that is earning virtually nothing. The company earned just $14 million on its quarter end cash balance of $51 billion. In fiscal 2011, Apple is likely to earn around $20 per share, placing the stock at just 12-13 times earnings adjusted for cash. That is pretty darn inexpensive for a company that has grown revnues 67%, 61%, 49%, and 32%, over the most recent four quarters.
The stock traded down to $298 while the conference call was going on and has rebounded to $311, down just $6 a few hours into Tuesday's trading. A breather is nothing to be worried about given that the stock had run from $240 to $320 in since the end of August.
Below are the tweets I posted on Twitter as I was analyzing the press release and listening to the conference call. I find the exercise of live commentary useful as first impressions are quite important for constructing my big picture views. Please forgive the jargon and shorthand!
$AAPL fin'l statements look fine. Tax rate low. Adds 17 cents. Street wanted more from guidance. iPhones gr8 iPads/Pods lite. Macs in line
$AAPL guidance implies 35% gross mgn. Has not been that low since 2Q08. Nothing wrong here but a stock that went up already.
If $AAPL DecQ gross mgn is 37%, flat seq, EPS is $5.15 or consensus. Assumes no rev beat. If rev beats by $2B at 37% gross mgn, EPS is $5.75
$AAPL cash now $55 per share. Earned $14M interest last Q. Adj price is now $242 vs $20+ CY11 EPS. Stock remains cheap.
Jobs on $AAPL call. Staying for Q&A. Notes outsold $RIMM in units. Software poses challenge for $RIMM. 275,000 iOS devices per day >Android.
$AAPL Jobs talking about open/closed. Notes Android fragmented OS after handset manufacturers add software. Multiple app stores for Android.
$AAPL Jobs talking about benefits of closed strategies: integrated vs. fragmented. Now shifting to tablet competition.
$AAPL Jobs notes 7" screen is 45% as large as iPad. Will hurt tablet apps even at higher resolution. Small size hurts app development.
$AAPL calls 7" tablets tweeners. Why carry if you already have a phone? $GOOG says to wait on using Android because it is not ready.
$AAPL Jobs notes new tablets still pretty expensive and offer less for more. Sees 7" tabs as "DOA." Now starting Q&A.
$AAPL 1st Q: Supply constraints on iPad? Balanced in Sept. Expanded distribution as a result. 2nd Q: gross margin headwinds?
$AAPL Jobs notes iPad impact on notebooks. Education, health & Biz pulling. "I see it as really big." Doesn't see competitor tabs right now.
$AAPL Q&A: new iPods/iPad in Dec Q mix pressure gross mgn. Notes sharper pricing for more functionality in all podcuts as well as mix.
$AAPL Jobs wants to keep cash powder dry. "There are one or more business opportunities in future."
Excellent $AAPL analyst at Bernstein engages Jobs in discussion of approach to mkt: just share? price points? vs. competition. Good stuff.
$AAPL Q&A is focused more on gross mgns than anything else. 40% plus from 2Q09 to 2Q10 but now mid/upper 30% is confusing spreadsheets.
Disclosure: Apple is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg's personal accounts. Steve is sole proprietor of Northlake, an SEC registered investment advisor.
Posted by Steve Birenberg at October 19, 2010 10:59 AM in AAPL
WHAT DO YOU EXPECT AT NEXT WEEK'S CETV CONFERENCE CALL-NO CHANGE OR IMPROVES VISABILITY FOR THE
FUTURE?
WHAT DO YOU THINK OF BIDU'D FUTURE WHEN COMPARED TO GOOGLE- WHICH IS THE BETTER PLAY AT THIS TIME?
DO YOU THINK THE DROP IN COMMODITIES IS PRECEDING AN OVERALL MARKET CORRECTION PRIOR TO THE ELECTION?
CETV preannounced when they did their bond offering. Slight miss but nothing major and they held full year guidance. I think they might say things look better in certain markets (Czech). Analysts will ask about guidance in lieu of currecny moving in their favor since prior guidance. Purely on math they should be raising guidance if all else is equal. If they don;t it will be a negative but not an important one. What matters here is if/when a real turn.
BIDE trades at 40-50 times earnings. Not my thing. Big future and they reported a solid beat and raise. It's OK to own but there is ZERO margin for error at that P-E.
Not sure on the commodities. There is so much global macro trading money that is all highly correlated that I am not sure market movements can be predicted. I think the rest of the world is recovering and latent demand exists in the US. Commodity pullbacks have been pretty mild so as of now I would not read much into it.
The election is less than two weeks. Predicting market movement in that time frame is nothing more than coin flip. Momentum to the upside is strong so I would not be playing for a correction next week if that was how I invested. A run to the yearly highs seems plausible. That is another 4-5% up. Maybe a sell the news reaction to the election the November Fed meeting triggers a correction form higher levels.
Posted by: Steve at October 22, 2010 02:07 PM