21 July, 2008

Apple plays the Conversative card, sets Record June Quarter, shares go on sale

Amongst the iPhone 3G euphoria surrounding Apple (AAPL) these days is the bread and butter Computer and iPod business lines. Today, those lesser hyped money-machines were in the spotlight as the Cupertino Computer underdog posted an impressive and record breaking quarter.

Results coming across the wires placed Apple with $1.19/share in profits from $7.46Billion in revenue. Considering the street was averaged in at $1.07/share and $7.36Billion across the top line, those numbers represent a dramatic earnings beat. On the sales side, the company sold a whisker-shy of 2.5Million Mac computers, over 11Million iPods and over 700Thousand iPhones. All figures above or right at Wall St. predicted levels.

The problem with Apple, as always, is the conservative guidance game the company plays with analysts and investors. The Street had earnings for next quarter pegged at $1.24 on Revenue over $8.3Billion, pretty ambitious but certainly achievable as the popular Back To School computer shopping season is in full force, as well as the successful launch of the iPhone 3G. Apple's story for next quarter was incredibly conservative with earnings of about $1.00 on revenue of $7.8Billion.

Considering 3 months ago at this time Apple was saying the just ended quarter would yield profits around $1.00, which they have now beat by 20%, one would think the analyst community would get used to the, as some have coined, "sand-bagging". Not so, Apple shares took an after hours tumble of $15/share after the results were posted.

With the company having such an extraordinary growth trajectory, why the conservative guidance? Well for one, reeling in expectations is a gigantic undertaking when dealing with a company of Apple's substance, style and mystique. The company shroud of secrecy with new products, product refreshes, and partnerships adds to that mystique and as the general public feels the excitement of new Apple products, or Apple success, so too does the Wall St. community.

From time to time, these expectations have to be brought back to reality. The current quarter saw Apple deliver 44% year over year revenue growth and 30% year over year profit growth.
Expectations for next quarter currently expect growth of about 35% revenue and 23% profit. By creating a situation where expectations curb themselves into the 30%-20% zone, Apple will be poised to once again play the old "under-promise and over-deliver" poker hand.

Given that it's the popular back-to-school shopping season, Apple has year after year went further and further with its iPod giveaways tied to new Mac purchases. This year was the biggest yet, as the company is including iPod Touch devices with the promotion. These giveaways aren't cheap and can put pressure on margins. However, last year at the time the company was also doing its "biggest back to school promotion ever" and somehow seemed to land on its feet and blow away analyst profit expectations.

The bottom line here is, that once again Investors have a chance to pick up Apple at a discount. Considering with this most recent report, the company has earned $5.12/share over the last 12 months and is looking ahead to growth rates of about 30%+ for the next 12 months. This sets a P/E at current after hours levels of 30. Perhaps that can be considered high but with a Price to Earnings Growth ratio under 1 and growth continuing in the Mac and iPhone segments of Apple's business the future does seem bright, even if current economic turbulences keep Apple from all time share price highs.

In the $150s, and looking out 1-to-2 years, it's a steal, plain and simple.

Disclosure: Author is long AAPL

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