22 January, 2008

Apple Shares Slide as Conservative Guidance bests Record Results

The hype machine that is Apple (AAPL) has run into a series of Investor stumbling blocks of late. Not only is the degradation of the US economy foiling its plans for personal electronic revolution, the company has had to deal with an increased footprint, Greenpeace complaints, Product Leaks, and somewhat unrealistic expectations of itself and its results! And all the while, maintaining record revenues and profits. The Dec 07 quarter was no exception as Apple delivered earnings of $1.76/share.

Apple's own guidance, always thought to be conservative, for the Christmas quarter was seemingly aggresive in the $1.40/share range, while The Street pegged earnings in the $1.50s. Fast forward to right before earnings and The Street's consensus estimate had jumped to $1.62/share with whispers of Apple delivering close to $1.80. Consider that one year ago Apple delivered $1.14/share and their own guidance was already close to a 30% rate of growth year over year. Those ever ambitious analysts on The Street were expecting over 40% year over year growth.

So, broken down and battered by recession fears Apple delivered $1.76/share, representing a 54% year over year profit growth rate! Remarkable! With the sales breakdown producing even more records for the company. Revenues gained 35% year over year to $9.6Billion.

Over 2.3 Million Mac Computers sold
Over 22.1 Million iPods sold
Over 2.3 Million iPhones sold

And this just begins to scratch the surface of the company's historic and record setting quarter. Now analysts had their own ideas and Apple matched, or bested all of them except for the numbers of iPod units sold, however, iPod revenue grew much faster than unit sales did (17% vs 5%), meaning the product shift had begun towards more expensive and higher margin models. Analysts were expecting higher unit sales in the neighbourhood of 23-25Million for Apple's very successful music player business.

Good old trusty Apple CFO Peter Oppenheimer gave the traditional spiel of "We give guidance we have reasonable confidence in achieving" just like every other quarter but analysts were taken aback at how soft the next quarter may be for Apple. Is the economic slowdown in the US going to effect this high profile firm this dramatically? Apple's guidance of $0.94/share looks soft on the outside, considering it reported $0.87/share a year ago at that time. How quickly analysts forget that Apple's guidance a year ago was around the $0.60/share mark. But, for Traders $0.87/share represents only an 8% year over year increase in profit! And this sent the stock spiraling after hours. Apple, which had found itself at record levels above $200, just weeks ago, has seen shares fall to the mid $155 range at closing, and further down to below $140 after the results came in.

The stock took an 11% hit to $138 after results and guidance were announced. This is too much, even in a turbulent economic picture such as the one that's painted for the United States. Apple's trailing earnings with this result stand at $4.56 or a 30 P/E. For growth of 54% year over year, this is astonishingly cheap! But don't jump on the trigger just because of that. Even though the Price-Earnings Growth multiple looks very attractive, it doesn't paint the entire economic picture. If recession is as likely as The Street makes it out to be, Apple could very well fall to a PEG of 0.5, from its current 0.55. Meaning that if next quarter's growth continues near 50% (regardless of conservative guidance) Apple could trade at a P/E of 25 given current economic conditions. On earnings of $5/share that would value Apple at $125. This I would see as an absolute bottom for the stock of this successful company.

Looking at the big picture, iPhone growth is an area where Apple will continue to see acceleration in earnings, due to its carrier revenue deals, and these will become a major part of earnings in 2008 and 2009. As the installed base of iPhone users grow, the recurring revenue Apple generates will follow suit, in a major way. Monthly payments to Apple from each of its carrier partners will become the big earnings story for the stock, along with revamped and redesigned entries to its popular Notebook Computer line.

I summarized where I think the bottom could be, but what about the bullish side of Apple. Well, once Wall Street gets its head around the conservative guidance game once again, and CEO Steve Jobs brings the Press together for a couple product events (New Laptops, A Tablet, iPhone SDK, WWDC and more) the Apple story will be once again first and foremost on Technology Investor's radars and the company can regain a P/E ratio of 40 going into the end of 2008. The end result in this case, if the US economy finds its footing and can sharpen growth expectations going forward, is a company continuing its string of successes over the past few years. Earning close to $6/share in FY2008 and capping the year at over $230!

So with the Bull and Bear cases in hand, it is up to Investors and the US economy to decide where Apple will be taken for a ride next!

Disclosure: Author is long AAPL

1 comment:

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