Apple's Q2: A test of fundamentals
When Apple (AAPL) reported its fiscal 2009 first-quarter earnings, exactly three months ago, the stock opened the day at $78.20, its lowest point since October 2006.
On Wednesday, when Apple is scheduled to report its second-quarter results, the same shares opened at $122.27 — a 56% increase.
While that's still below the price targets set by most analysts — many of whom revised their targets upward in just the past week — some think Apple's share price has got ahead of itself.
RBC Capital's Mike Abramsky (an Apple bear) said as much in a note to clients Tuesday. "Valuation has risen faster than peers … and while we expect near term upside around the refreshed iPhone, we continue to see elevated challenges ahead to valuation."
Still, Apple is not in the same kind of trouble as its competitors — like Dell (DELL) for example. Apple still has rich cash holdings ($25 billion, or $29 per share), enviable profit margins (34.7% last quarter) and the deferred revenue from seven quarters of iPhone sales (which could add 30 or 40 cents to its earnings per share).
But the company has a basic problem with its fundamentals: two of its three primary engines of growth have stalled.
As Silicon Alley's Dan Frommer points out, the Street is expecting Apple to report that it shipped 2.1 to 2.2 million Macs in the second quarter — a year-over-year decline of 4% to 9%. That would represent the first time in five years that Mac sales have shrunk. Moreover, it's being compared with a quarter (2008 Q2) in which Mac sales grew by more than 50%. (See chart below.)
Chart: Andy Zaky
Meanwhile, iPod shipments are also expected to shrink — a 6% decline, to about 10 million units.
The iPhone — which was supposed to fill the gap — is still on its growth curve. The Street expects Apple to report that it shipped 3.3 million units in the quarter, nearly doubling last year's Q2 shipments of 1.7 million.
But that may not be enough to make up the difference. The consensus, according to Thomson Financial, is that Apple will report earnings of $1.09 a share on revenues of $7.94 billion — a 5.7% year-to-year increase in revenue and a 6% decline in earnings.
"How can the market justify giving Apple a 22 P/E," asks Andy Zaky of Bullish Cross, "when it's not growing at all?"
Zaky, a blogger-analyst who has taken his Apple profits and turned "agnostic" on the stock, acknowledges that he could be wrong. One could argue, he says, that the market has already adjusted for the current state of affairs by taking Apple's stock price from $200 to $120. Or that Apple's growth drivers have stalled because of weakness in the economy and not because there's anything inherently wrong with the company.
And there are several things that could kick-start Apple's growth. Like if the rumors are true that Apple is about to cut an iPhone deal in China, or that it's set to unveil a new family of iPhones, or that it's working on a new device that will be its answer to all those $400 netbooks — or that the global economy has turned a corner and started to recover.
Meanwhile, the pressure is on COO Tim Cook (standing in for Steve Jobs) and CFO Peter Oppenheimer to report Q2 results that surprise the skeptics, chart a path for growth and offer guidance for Q3 that, while dutifully conservative, reflects a little more confidence in Apple's future.
Apple will report its earnings on Wednesday after the markets close. A conference call with reporters and analysts is scheduled for 5 p.m. ET (2 p.m. PT). Tune in here for live coverage and analysis.
See also:
- Bearish grunts from a pair of Apple bulls
- Why Apple’s shares rose as its market share shrank
- Kaufman’s Wu changes tune, ups Apple target 26%
- Barclays raises its Apple target 26%
Below the fold: more Zaky charts, including operating expenses by quarter and Mac sales by region.
Why do "experts" ignore the revenue from iTunes. The iPhone has provided a new source of revenue – iPhone apps. And since Windows nows runs on Mac's, some IT bucks may begin flowing toward Apple.
In regard to Abramsky's comment about Apple's shareprice having gotten ahead of itself, what is he smoking?
The market is up 30%, and Apple is up 50%. Apple has a beta of 1.7. This is expected. Apple is no more ahead of the market, than the market is ahead of itself, and the market can't be ahead of itself.
Someone tell Abramsky to look up Sharpe's beta.
Nick -
You might mislead people when you say nobody wants to "spend $300" on yet another ipod.
You can get a Classic with a large drive for $249. Or a Nano for under $200. Or even an entry level touch for $229. Only one iPod costs over $300.
I don't even look at PC prices. Microsoft will have to make a ton of improvements before I consider buying anything that runs Windows again. I open my aluminum Macbook and it's ready to work. Every time.
It isn't the lousy economic environment. That card has been played over & over again. Most companies are doing much better than the media is reporting.
Here are Easy reasons
everyone under 30 has an Ipod or multiple Ipods. No new ipod except for the disposable shuffle has come out in over a year to compel someone to spend $300 on yet another Ipod to add to their collecton
The new Iphone is coming out this summer Iphone 3.0 with better hardware better to wait for that.
Mac books are close to $3,000 for the 17inch macbook pro, the regular mac is $999 but like a stripped down economy car or you can get an HP HDx 18inch computer for $1899.
Flat earnings yet high margins in an economic downturn. Pretty impressive.
Also, it makes them just about the perfect bellweather stock. When their earnings start to seriously increase, you can bank on it that the recession is over!
Looking forward to the call. But I'm REALLY looking forward to my first iPhone in June. Along with plenty of other people who've been under contract for the iPhone's first two years.
When the market gets its feet aapl will get back to $200 and beyond.
Did you mean Thomson or Thompson? It's usually Thomson quoted in earnings previews, that's why I'm asking.
ex ped: It's Thomson. Thanks for the catch. Fixed now.
in my humble opinion it's pretty clear that any stalled growth is a result of the lousy economic environment. also obvious is that the share price is looking beyond the near term to the quarters ahead with an eye towards the resumption of growth and new products driving multiple segments.
and it's 28,1 bn in cash as of the end of last quarter and probably around 31 bn today.
ex ped: Right you are, according to Apple's Q1 earnings call. Yahoo Finance has it wrong.
I don't see why investor's don't look at the relative value of Apple to other PC vendors. All the vendors are doing poorly and yet Apple is doing relatively better than the rest. Did any computer company manage to increase sales in this quarter? Probably not. Apple is likely in the best position over all of them. Profit margins should count for something.
I'm just hoping Apple shares don't tank. I still think if RIM was able to do well on it's last past earnings, Apple should be able to do well, too.
PED said:
“How can the market justify giving Apple a 22 P/E,” asks Andy Zaky of Bullish Cross, “when it’s not growing at all?”
Andy has always been too impatient. It makes no sense to value a company exclusively on its performance on the most recent quarter. On top of that, you just can't base it solely on that measly $1.09 consensus EPS. If you're going to trust the analysts, at least look a year or two ahead and base your fair stock price on that expected medium-term growth. Nobody (except Andy) is seriously considering this supposed lack of growth (so far it's only been the December quarter of flat growth, so let's wait a few hours before calling this one a decline, and this of course is only on a GAAP basis) as a long-term prospect for Apple.
Perhaps Andy should read some of his own recent articles. I remember one about valuation that could help him regain some perspective (as long as he's able to filter through the euphoric and hyperbolic style).
Oh and BTW, it's RBC CapitAl, not Capitol.
ex ped: Thanks. Fixed.
Congrats success in getting profits after 3 yrs of loss. Continue these profits for ever.