Yesterday, I wrote in a preview of Apple’s earnings for Wall Street All-Stars and Minyanville that the company needed to report over $8.25 in earnings with good guidance for the stock to respond positively in the very short-term. Consensus EPS was for $7.30. Honestly, I never even considered the possibility that the company would miss consensus. As result, despite the excellent guidance, the 5% decline in the shares this morning is not surprising. In fact, I am surprised it is not a little worse.
I think Apple remains extremely attractive for the long-term, a target over $500 in the next 6 to 9 months is easily achievable. In the near-term, however, I think the bloom is off the rose, or the shine off the apple. The stock is over owned and over weighted in most amateur and professional investor portfolios. I think this sets up a poor near-term supply demand balance for the shares with more risk to the downside. For Northlake clients, I am trimming positions slightly where they are dramatically overweighted. Basically, Apple has gone from golden delicious to just another attractive stock, at least for the short-term.
Looking more closely at the quarter, the shortfall against the consensus estimate and the much higher whisper numbers came primarily from iPhone sales. Despite management cautioning the Street on the last call to expect a slowdown in unit volumes as the launch of the next iPhone approached, analysts stuck with higher numbers. I think management was clear on last night’s conference call that this was a transition issue. Detailed figures on inventories and recent sales suggest the shortfall will be more than made up in current quarter.
Getting less attention was a modest miss in iPad unit volumes. Unit sales of 11.1 million feel short of consensus for 11.6 million. Given that Apple entered the quarter with too little iPad inventory, providing several million units of inventory build, I expected iPad units to exceed consensus. I suspect this will be a non-issue when we see holiday iPad sales but it adds another issue for the shares in the near-term.
Guidance was excellent. Some observers are noting that the quarter includes an extra week. Others think it is no coincidence that for once Apple guided above the Street and it just so happened to occur when the company missed earnings for the first time since 2004. I think this is an overly cynical view. Management noted the extra week between Christmas and New Year’s is not a big one historically. More importantly, Apple has guided above the Street a few times in the past.
As I noted, the shine is of the Apple story for short-term. However, the growth outlook is still excellent, north of 20% easily for 2012. Adjusting for $86 per share in cash, growing by about $20 a year, the shares trade at less than 10 times 2012 earnings estimates. The low valuation has been in place for a long-time, likely expecting a period when Steve Jobs passed away and the company’s growth rate disappointed. Assuming the December quarter beats estimates, I think the shares will rally to substantial new highs. But in the near-term, there is a good chance the stock struggles. Apple is different story depending on your investment horizon, your trading appetite, and your position size. A little caution in the near-term makes sense, however.
Disclosure: AAPL 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. AAPL is a net long position in the Entermedia Funds. The Entermedia Funds are long/short equity hedge funds focused on media, entertainment, communications, and related technologies. Steve is co-portfolio manager of Entermedia, owns a stake in Entermedia’s investment management company, and has personal monies invested in the Funds.