Apple: Still a good Buy?
Posted on: October 27, 2008 - Email Article - Printable Version
Apple [AAPL: 94.58, +3.83 (+4.22%)] released earnings after the close on Tuesday, as investors waited to see how the firm would respond to the downturn in the economy, consumer spending and retail sales. To say their numbers were good would be an understatement. They blew away Wall Street’s expectation in basically every category except for the number of Macs sold during the quarter. But as usual, Apple low balled their guidance, although shares did rally on the news. Let’s take a quick look at the numbers.
Earnings Review
Apple reported EPS of $1.26, well above estimates of $1.11. Revenue for the quarter was $7.9 billion, which represents a 27% growth rate YoY. Another surprising piece of information was the gross margin number for Apple, which came in at 34.7%, due to a better pricing environment, higher software sales, iPhone payments and the lower costs of new iPod line. The firm sold 6.9 million iPhones this quarter alone, which allowed them to surpass their goal of 10 million iPhone sales for the year, only three quarters through the year. Unit Mac sales came in at 2.6 million, which was below estimates. While they gained market share in the PC category, the firm saw a slowdown in the weeks prior to the launch of their new Macbook and Macbook Pro, as people delayed purchases in anticipation. Demand picked up right after the conference, so I would not think it is something to worry about. iPod unit sales came in at 11 million an increase of 8% over a year ago. The introduction of their new iPod nano with curved aluminum and glass design and lower entry price on most models should keep momentum up for the iPod unit in the future. Apple ends their fiscal year with $25 billion in cash and no debt and in an environment where credit risks are extremely high and cash is king, from a financial stability standpoint, it does not get much better than that.
The problem as usual with Apple was their guidance. They guided for between $1.06 - $1.35 in EPS for the next quarter, gross margins of 30-31% as the sell of new Mac’s and iPods affect margins, and revenue between $9 to $10 billion. All of these were below Wall Street estimates, but given the current economic environment it is probably better to stay conservative, Apple always does it anyway, so why stop now.
And for those who though Steve Jobs is near his deathbed, he did make an appearance on the conference call, making comments and fielding questions. Asked if this would become a regular thing, Jobs said it was not likely, but it should ease shareholders to know that his health concerns could be over-exaggerated.
iPhone
I am normally not one to quibble over the iPhone as it has not represented a significant portion of revenues for Apple, but its results were astonishing this quarter. The introduction of the 3G iPhone was better than most expected. The 6.9 million units sold, was higher than RIMM [RIMM: 43.30, +1.38 (+3.29%)], which had 6.1 million units sold. So after 15 months of operation, the iPhone, at least in 1 quarter, has generated more sales than the Blackberry, which is pretty impressive. Apple’s strategy to build one phone that has technologically advanced software, as opposed to putting out many different phones seems to be paying off. Early reviews of the App store are all positive and there seems to be a lot of forward momentum for the iPhone.
Management also disclosed an interesting non-GAAP number that they use internally to check how they are doing, which they believe is a better indicator than the GAAP number. Due to accounting standards the revenue for the iPhone and its associated cost of goods sold is recognized over the 2 year period during which the iPhone is contracted. So that being said, Apple can not recognize fully the revenues from iPhone, but had they done so, sales would have ballooned to $11.69 billion and the iPhone would have represented an amazing 39% of revenue for Apple, which is astonishing given its short time in the marketplace. This growth was largely due to international expansion, from six to 51 countries, with plan to expand into 70 by the end of December. This growing international presence should help drive sales going forward. Maybe not at the explosive growth rate they have seen till now, but still solid in my opinion. Based on revenues Apple is now the third largest mobile phone supplier with $4.6 billion in handset revenue. With that being said, it was a very impressive quarter for the iPhone.
Establishing Market Dominance during Down Times
Apple performed pretty well considering the economic environment as they continue to gain market share in the markets that they operate in. To take a quote from Steve Jobs, I think sums up not only why Apple has done well in the past, but should continue to perform even throughout this downturn:
We have almost $25 billion safely in the bank and zero debt. This provides us tremendous stability and the ability to invest our way through this downturn. That is what we did during the last downturn - we increased R&D investments and created some of our best new products and businesses, like the Apple retail stores, for one. This downturn may also present some extraordinary opportunities for companies that have the cash to take advantage of them like Apple does.
For those that don’t remember the iPod was introduced during the last downturn and has helped rejuvenate Apple. To say they are not some of the best technological innovators of our time we would have to be kidding ourselves. The higher unit sales of iPhone over the Blackberry could just be foreshadowing Apple taking advantage of a down market and a strong financial situation to exploit their competitors and gain even more market share in a tough environment. While the economic environment will likely effect Apple in the short term, in the long term, like most recessions, the contenders are separated from the pretenders, and Apple is a contender. Look for them to come out of this downturn in pristine condition in comparison to some of their competitors.
All that being said at this point any type of investment in the stock market is risky, but it is all about finding long term fundamentals. The macro environment is obviously not favorable, but with a 40% drop in peak-to-trough in the S&P 500, a full blown recession is almost nearly priced in. Obviously short term movements are unpredictable, but Apple should be fine in the long term. And while Jobs was tight lipped about new products, I have no doubt that their new technologies in the future will be ground breaking and help support Apple for the next few years. In terms of historical valuation, Apple has taken a beating and looks pretty good right now, but what doesn’t. It could just be the perfect time to get in.
-Vinay Ayala
Disclosure: The author is long AAPL
The Following Stocks Were Mentioned In This Article: AAPL, rimm
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Can you imagine what the share price of any other company would be if they started a company and 15 months later were a multi-billion dollar business? I just makes me want to scream Don’t You See Don’t you get it!
interesting