The Month that was Espana's

The World Cup in South Africa has now come and gone with the Spanish armada being crowned World Cup Champions. After a month long spectacle that saw Europe descend and then resurrect into the new football--um soccer, power the Oranje of the Dutch can only reminisce at what could of been after a hard fought, often literally, 1-0 World Cup Final Match.

Sports it seems has taken center stage of late, to the delight of BP (BP) which has seen it's stock drop 40% in the last three months as the Oil Spill, caused by the explosion of the Deepwater Horizon rig in the Gulf of Mexico continues to rage on. A $20 Billion expense net already set up by the company for damages and clean up, is a big chuck of change, even to big oil! But the biggest news coming to the state of Florida may not be the drifting oil slick but LeBron James.

The biggest name in Basketball decided to take his talents from Cleveland to Miami to play for the Heat franchise with fellow free-agents Chris Bosh and Dwyane Wade. A move that makes Miami the center of the basketball universe and puts the triumvirate within earshot of a sports dynasty.

But this time of year isn't just for Soccer tournaments and sports free agency, with the June quarter ending, earnings announcements will be gearing into full swing, especially in the technology space, with some of the biggest names like Google (GOOG), Microsoft (MSFT), Intel (INTC) and Apple (AAPL) expected this week and next.

With the economy and employment picture still at the forefront of a shaky market, there's a lot of questions about where the earning's growth will come from. Microsoft and Intel are set to benefit from a upgrade cycle of computers and software in the corporate space, especially the software giant from Seattle as it bangs the Windows 7 drum, to distance further and further from the previous and ultimately drastic under-achiever that was Windows Vista. Where as Google and Apple are capturing the mind-space of the consumer with highly successful smart-phone platforms Android and iOS respectively.

Apple's iPhone 4 launch was the most successful yet, selling 1.7 Million units in the first 3 days and adding to that 3 Million iPad tablets sold, in just under 3 months, and Apple investors continue to move towards higher and higher expectations. While Google's Android software is being pushed hard by phone carriers around the world, Google by giving its software away for free isn't exactly lining its pockets. What the company is banking on, is the ubiquitous nature of its search brand and mobile applications. An Android world means Google at the front and center of that many more mobile screens and quests for information.

The start of this summer and past the holiday weekends in North America have been dominated by the Sports pages, but now as the stadium lights dim on South Africa and the LeBron nuptials are signed, the focus shifts back to the markets and a slew of earnings releases and conference call transcripts to pour over and discover the next investment opportunity.

Disclosure: Author owns AAPL, GOOG

Sales Momentum ramps for Apple as iPhone powers earnings

Apple (AAPL) sells a couple products that it labels with the term 'magic', its multi-touch mouse and new iPad Tablet, but after the company's March quarterly earnings, reported Tuesday after the market close, sales of Apples seem out of a fairy tale.

Analysts Wednesday morning have been pushing over themselves digesting the news and raising price targets further. RBC now joins the highest estimate on Wall Street with its brand new price target of $350 for the Cupertino electronics company. Several other firms including Piper Jaffray, Oppenheimer and J.P. Morgan pushed through or moved higher than $300 as well. And after dissecting Apple's report there are many compelling reasons why.

First though, what about the quarter? Well let's recap expectations coming in and see just how handily Apple beat them.

Financial Metrics
exp. $12.06 Billion in Revenue <-> $13.5 Billion in Revenue
exp. $2.45/share in Earnings <-> $3.33/share in Earnings ($3.07 Billion in Profits)

Unit Metrics
exp. 2.7 Million Macs <-> 2.94 Million Macs
exp. 6.8 Million iPhones <-> 8.75 Million iPhones
exp. 9.0 Million iPods <-> 10.89 Million iPods

An astounding financial performance by any measure expected by Wall Street professionals. Apple's sales momentum is at an all time high and the product mix the company has to offer is striking the right chord with consumers even during a time when retail spending hasn't fully begun its recovery, due to continued high unemployment and the global economy's sputtering into growth.

The real story here is the strength of the iPhone. With the AppStore under its wing, the massively popular platform continues to grow in International and Domestic markets. Growth numbers are almost double overseas for Apple as it continues to add more carrier partners and branches into business models that include multiple-carriers in the same country, something it has yet to do in its home market, the United States. The upside surprise on iPhone sales, given its $600 Average Selling Price accounted for the vast majority of the $1.5 Billion in Revenue that Apple over-achieved this quarter.

But just to get back to the numbers, beating the street is one thing, but crushing expectations to this magnitude is quite another. Apple's own guidance is always conservative to the point where one wonders when they will stop giving any at all. For the concluded quarter Apple brass presented the street with ranges of $11 to $11.4 Billion in Revenue and $2.06 to $2.18 in EPS. The street's expectations were
5-9% higher on Revenue and 12-19% higher on EPS, so it's not as if Wall Street is just marching to Apple's expectations drum. The company however, does very well in controlling and managing expectations, it does well in controlling just about everything it can, well except for the massive leak of the next generation iPhone that was widely reported on gadget blogs and Apple faithful websites.

The fact that Apple beat the street's already higher estimates by 12% on Revenue and 36% on EPS is the kind of operational performance that makes the company among the most admired in the world, and leads to the collective fawning markets are seeing this morning with Upgrades and Price Target hikes. Of course Long Investors are just as thrilled about the 6% move in the stock to an all time high near $260.

The first 6 months of a new year are typically seen as 'seasonal' by the industry but the only thing seasonal now is the collective scrambling of Wall Street's major analysts in their re-writing of the rules of the road for Apple future estimates and valuations. In the press release, CEO Steve Jobs touted having several more extraordinary products in the pipeline for this year and so far the smart money's on the cats-out-of-the-bag 4th Generation iPhone. The company also has previewed its next iPhone Operating System, improved its high selling MacBook Pro line of laptops and is likely nearing the 1 Million in sales mark for its iPad device after just going on sale mere weeks ago. The upcoming quarter includes the launch of the iPad with 3G networking, the International launch of the iPad and likely invitations for the next iPhone announcement, expected in June.

Apple continues to be a must own Technology stock and one that is running with a Sales and Product tailwind unlike any in its history. But with all the love, who's left to buy it? With quarterly performances like this one, somehow, somewhere, investors will continue to be found.

Disclosure: Author is long AAPL

Digesting Apple's Pie... and Tablet

A certain Cupertino company, best known for selling a few computers, music players and telephones, had all of Wall St. in a frenzy yesterday as it announced quarterly earnings for the December quarter. A Christmas quarter that was wildly expected to be the most profitable in history for Cupertino based Apple Inc. (AAPL).

Expectations were inching up until analysts had settled on Income of around $2.10/share and Revenue of about $12Billion. Apple's reported numbers came in at Income of $3.67/share and Revenue of $15.7Billion, and that's where the confusion began. Just at a glance it seems something isn't right or analysts had spent too much time in the sun. Exchanges halted the stock in after-hours trading yesterday as Apple officially changed its accounting presentation to remove the controversial "subscription model" for iPhone and AppleTV sales.

With subscription accounting, due to the nature of free software upgrades, Apple has had to account for iPhone and AppleTV sales over a two year time frame, breaking up all related Revenue and Costs and lumped the rest in a deferred item on the balance sheet that caused analysts headaches and long hours at the calculators. When Wall St. still struggled to properly value this cash-generating machine Apple provided non-deferred numbers alongside the official GAAP figures. It also petitioned the standards boards to get rid of the subscription requirement.

In September 2009, the company got its wish and is now able to report Revenue and Earnings with minimal "subscription" effects (A nominal estimate representing the value of future software upgrades, which for Apple represents $25/iPhone and $10/AppleTV). The company decided that starting its new fiscal year was the prudent time to put this practice into place and the Wall Streeters were certainly caught off guard. When Apple stock resumed trading the price activity was very mixed until finally settling into a minimal after hours gain.

So that's the logistics of accounting, but what about the quarter? Apple certainly had its pie and is enjoying every bite. A record quarter in terms of profitability and Revenue starts off another successful year for the electronics maker.

Revenue: $15.68Billion vs $11.88Billion year over year.
Earnings: $3.38Billion or $3.67/share vs $2.26Billion or $2.50/share year over year

Mac Computer sales were a record at 3.36 Million units, besting the previous mark by 300,000, highlighted by the recent introduction of the new iMac desktop line.

iPod sales came in at 21 Million units, down slightly but well expected by the company as this market matures. The silver lining in the iPod numbers is the 55% growth rate in iPod Touch sales, bringing up the Average Selling Price of the business unit.

iPhone (which by definition is also an iPod) sales grew by 100% to 8.7 Million units, a quarterly shipment record, which should be noted was below the 9 Million unit consensus estimates. Some iPhone sales targets were even higher but increased competition in the space and a muted start in China is likely to blame for the shortfall. Another point to consider is the inventory channel, of which Apple is said to be one of the most efficient in the space. The company addressed this on the their conference call by re-iterating that its inventory channel is counted in a more conservative manner than competitors. The real kicker, the Average Selling Price of iPhone is $620!

It's usually the guidance game that is important to analysts and investors when Apple issues quarterly reports, however, during this announcement all eyes were and are awaiting what the company will showcase at its media event on Wednesday. Apple executives throughout much of the conference call almost gave the impression of toying with analysts, while likely secretly passing notes back and forth along the lines of "wait till they get a look at iPad"; or whatever the Tablet eventually is crowned.

The usual Apple hype machine is reaching fever pitch again and is strikingly reminiscent of the time just prior to the MacWorld keynote speech in 2007 when Steve Jobs unveiled the first iPhone to the world. News tidbits are flying out from several sources that Mr. Jobs claims the Tablet is the most important thing he's ever done, and in his customary quote on the quarterly press release he re-iterates that this week includes a new product release the company is very excited about. COO Tim Cook stoked the fires further on the conference call when asked about new product opportunities: "I don't want to take away your joy and surprise", referring to the planned Wednesday event. When Tim Cook, Apple's guru of manufacturing, retail and supply chain managment says "joy and surprise" there must be something special about this new device.

For one thing, Apple certainly have mastered the art of getting people interested and getting them in the room to have the conversation. Will the tablet be the be-all end-all of casual computing? A device to be left on the coffee table, used by anyone to control just about any media and anything electronic in their homes? Lots of questions remain and should be answered by the time Steve relents his magic wand by walking off that stage Wednesday. One thing is clear as day, and that's Apple's ability to cash in on their design prowess and excitement generation. The company took in a tidy sum last quarter, generating only about $5.8Billion in cash!

Disclosure: Author is long AAPL

Research In Motion Regains Footing

Some difference 3 months can make. Research In Motion (RIMM) stock 3 months ago was bearing the brunt of sell-off at the behest of disappointing performance and guidance, dipping from the mid $80s to the high $60s per share. The stock had mostly held water of late, sliding slightly to the low $60s but was in a position to change all that with another earnings report.

With the increasing competition from Apple's (AAPL) iPhone, Palm's (PALM) Pre and heightened marketing given to several smart-phones running Google's (GOOG) Android software RIM had to deliver, on all fronts, and it has. Blowing past all expected metrics is leading shares of RIM higher by 11% early in after hours trade.

The lines: Revenue of $3.92Billion vs $3.78Billion estimated; Income of $1.10/share vs $1.04/share estimated; Subscribers at 4.4Million vs 4.1Million estimated. RIM also shipped 10.1Million units during the quarter, including a milestone generating 75Millionth.

Seems the analyst talk of RIM's mighty fall via the dual-pronged iPhone/Android sword will have to wait for the time being as the folks from Waterloo can pop the bubbly for at least another quarter as going into the Christmas season the guidance RIM provided was very strong. Revenue of $4.3Billion vs $4.11Billion and EPS of $1.27/share vs $1.12.

So, with RIM so firmly positioned, what's wrong with the company and why isn't it a must own in the growing smart-phone industry? Two main reasons: Interfacing and Extensibility.

In interface design RIM is not even close to the same league as Apple, let alone the various flavours of Android that are appearing in the market-place. The company has such a culture entrenched in the corporate world that functionality for the consumer has always seemed like an after-thought with the current incarnations of the BlackBerry OS. This was most evident in both versions of the touch screen device Storm that the company debuted to scolding and muted critical response.

In regards to extensibility its hard to call RIM's platform a leader in any sense of the world. Its BlackBerry App World platform is another after-thought and in the days of the highly successful iPhone/iPod Touch AppStore, being an afterthought is just about being dead in the water. While Android is still nowhere near Apple's 100,000 applications catalog, it is getting there with over 16,000 available for various handsets. In this race RIM is already well-behind.

But there is a silver lining, the company makes very good looking hardware, for the most part, and is a staple in the corporate world, which is a business that isn't going anywhere and will grow with the rise of smart-phones world wise. Prospects continue to look good, and if the engineers can get their software act together for a new version of the BlackBerry OS, it really can be a 3 pronged fight in the mobile space for the decade to come, and that kind of potential will have analysts and investors eager to jump on board.

Disclosure: Author does not hold any position in RIMM, is long AAPL, GOOG

GPS Investors flee from Google's Shadow

Google Navigator, a seemingly natural extension of existing Google Maps technology that's found on smart-phone platforms like the iPhone and Android, has GPS company investors running from the hills.

The issue isn't that the technology from Google (GOOG) is significantly better, it does look very good and would be a formidable competitor, the issue is Google's affinity to price all-things-Internet at $0. Considering Navigation subscriptions run in the $100s of dollars/year, not to mention the cost of the units themselves, how many GPS users would turn to something else from, for now, trusted Google at zero cost that works on their existing cellular phone? I'd bet many, and the market is betting that way too. Gizmodo (Link), the technology blog, has an informed quick review of Google's entry into the Navigation business.

The sell-off in the market has certainly contributed to some of the downfall in GPS stocks, however major players Garmin (GRMN) and TomTom (TOM2) are down 16% and 20%, respectively.

The age of convergence in technology is certainly upon us, better cameras are coming to cellular phones, better media players are already there, and now GPS navigation capabilities are becoming mainstream. The stand-alone technology gadget/device is becoming a niche rather quickly.

Android, the free open-source cellular operating system developed by Google, is taking off by leaps and bounds this year, with several high profile phones on tap on high profile networks, such as Verizon (VZ), AT&T (T) and T-Mobile in the US. The platform, which recent research has predicted, could overtake the popular Apple (AAPL) iPhone in market-share over the next few years, needs applications like Google Navigator to be exclusive on enticing handsets in the months to come. The Momentum is building for Android and Google is keeping the fire lit with its Navigation application.

The only problem for investors, Google doesn't want to charge for anything but advertising! In all likelihood however, this is the next step in Navigator's life cycle, and Google can continue its march into dominance of the mobile ad industry, just as it has trounced the competition in search.

Disclosure: Author owns GOOG

Apple's Gunning for Records with September Quarter

As analysts line up their predictions for Apple's (AAPL) upcoming quarterly earnings report, one thing stands very clear. Records are made to be broken. In the quarter that saw the continued success of iPhone 3GS, price cuts on Mac Computers and a slew of upgraded or new iPods, the company is firmly poised to deliver its best back to school season ever. Apple's typically conservative guidance for this quarter called for earnings in the range of $1.18 to $1.23 in profit/share on sales of $8.7 to $8.9Billion.

Standing in stark contrast are analysts with Revenue figures at $9.2Billion and profits of $1.42/share on average. Apple over the last few years has beaten earnings expectations by a staggering 39% and Revenue by 7%. Perhaps the analysts have caught up this time? Not yet. 90 days ago the average estimates stood at $1.27 and have climbed since to $1.38 and where it currently stands at $1.42.

But, since when do analysts really have a handle on the hot trends of the day. The Apple generation of the 2000s have grown up with iPods being a must-have, the Mac as a must-have College tool and now the iPhone as the it mind-share capturing device. But analysts, like most things come in all shapes and sizes and estimates, certainly for Apple, can vary wildly.

On the Computer front, expectations have risen for Apple to sell upwards of 2.8Million machines, a new record for the company. In the year ago period, that number was 2.6Million. While iPods are slowly an eroding business, another 10Million units are expected to cross hands, and the stunning growth of the iPhone business will continue with estimated sales of about 7Million units.

While Apple's been dropping prices on Macs and iPods to maintain sales and grow share, it has plenty of room to keep margins steady as the iPhone is by all accounts a profitable monster, and the launch of Snow Leopard software adds to the margin story. Taken altogether and the pros are calling for continued sales success at Apple.

Whether the market believes it too is the next test.

Disclosure: Author owns AAPL

Drop In Jobless Claims Fails To Ignite Market

In what by most is seen as good news the job market showcased another data point in its long march towards stability. Jobless claims fell by about 20,000 to 530,000, which was slightly better than the 550,000 expected by economists and analysts.

Another rather important metric, continuous jobless claims (people making claims for longer than a week) fell by 123,000 to 6.14Million. These data points are giving economists positive signals that the job market is getting better, but cautious optimism aside, it also shows how much further there is to go.

The major benchmarks in the US opened slightly positive on the news but have since turned negative with the Nasdaq leading with a 1% decline.

In other news, some technology companies might to ready to appear more attractive to investors as what some call the "Apple rule" has been reversed. The required method of subscription accounting when dealing with hardware and software sales, most notably put into practice by Apple (AAPL) with its iPhone, will no longer be so as part of Generally Accepted Accounting Principles. This change allows Apple to record Revenue and Profit from iPhone sales in real-time as opposed to being force to account for each unit sold over a 2 year period. Amazon (AMZN) uses the same method of accounting for its Kindle e-book reading device and Palm (PALM) had adopted the method for its flagship Pre smartphone.

Why Apple is most noted for this change is relatively simple, it moves a staggering amount of iPhone units, at high margins, fueling renewed growth rates. Under the new standards, Apple is expected to report profitability that is 35-40% higher than it is currently allowed to. Fundamentally, there should be no change to the value of the company, simply a change in the accounting books, but for many P/E based traders and quantitative computer P/E based models, Apple will appear more attractive under these ratios. Amazon, Palm and other companies dealing with this change will not have their metrics altered nearly as much as Apple is expected to.

Disclosure: Author owns AAPL

Apple-China deal struck: iPhones official

China Unicom (CHU) and Apple (AAPL), after months of negotiations and several false starts, have completed a deal that will flood the Chinese market with legitimate iPhones before the year is out. China Unicom is building out its 3G network that will be ready by the end of the September for most of its 140Million plus subscribers, which is the biggest cell market that Apple has ever rolled the iPhone out into.

The uncomfortable love triangle that Apple found itself within in China was one that it had to complete for the continued dominance of its ubiquitous handset. China Mobile (CHL), the biggest carrier in the country with almost 500Million subscribers, was also in the running but several public disagreements with Apple over revenue sharing and control of the AppStore, made a deal impossible for the Cupertino electronics & design company.

Apple had to make a phone specific to the marketplace in China, with a mandate that wi-fi be removed from the iPhone, but for a market that size the company was willing to make concessions. The deal with the second largest carrier, Unicom, will allow Apple a foothold into the vast, electronic friendly marketplace, where several estimates have placed "grey-market" iPhones already in the country at more than a million units. With the country getting an official retail and distribution channel for the popular device, it will be interesting to see how the consumer in China responds to pricing and rate plans.

Like most "exclusive" deals that Apple strikes, there are certainly levels of buying the carrier of choice will have to make. That part of Apple's iPhone deals have been reported in several other markets like Russia for example. Apple did not get any revenue sharing in this agreement and the phones will simply be sold by China Unicom with subsidies. Reports have been denied that already 5Million units were ordered, but speculators have suggested that this number is quite reasonable, and in some cases underwhelming as it accounts for less than 1% cellular market penetration.

Playing with shipment volumes aside, the iPhone coming to China is a huge deal for Apple and its earnings going forward. The market in China of cellphone users will bump Apple's global addressable market significantly and even if sell-through rates do not meet expectations due to the rampant "grey-market" the channel fill will certainly help Apple's unit shipments and Revenues substantially. In the last quarter, the iPhone 3GS was launched, selling 1Million units in a weekend, leading to 5Million units sold in the quarter, a quarter that was largely applauded by Wall St. So how many will Apple sell in this quarter and the next as iPhones get bought and paid for by the company's Chinese partner? The answer I would think is at least 5Million on top that had previously been reported and debunked, if not significantly more.

Disclosure: Author is long AAPL

Apple earnings on tap after Tuesday's close. [Update]

Update: Apple's reported earnings included.

What can Apple Investors and traders expect after the bell today as one of tech's giants reports its June quarter? Well if one thing is certain with Apple, each line of business will be speculated on ad nauseum starting at about 4:30PM Eastern Time.

Likely much of the focus will be on the Mac and iPhone businesses. New price cuts for Mac Computers were implemented recently and according to shipment data and analyst reports, this could be a driver for higher unit sales and perhaps, less than hopelessly conservative guidance for September. The launch of the iPhone 3GS was a great success in the middle of June, which will likely prop unit sales significantly above previous expectations, however comparisons against the iPhone 3G launch are far more difficult as its launch window fell at the beginning of the July-September quarter of last year.

Of course, analysts will ask the company about Steve Jobs, who returned to work towards the tail end of June, after a 6 month medical leave. The company has come under intense scrutiny for not commenting on the health of its CEO, however, it goes without saying everyone in the extended Apple community hopes for good news for a long time to come on that front.

So, to the quarter. The average analyst estimates paint a picture of Profits at about $1.17/share on Revenue of $8.2Billion. Slowly as the quarter has come along, analyst numbers for Apple's unit sales have crept up and with that too went the Revenue target.

Year over year comparisons vs estimates for the quarter are as follows:

• 2008 Macs: 2.496Million Units vs 2009 Macs: 2.5Million Units
• 2008 iPods: 11.011Million Units vs 2009 iPods: 9.5Million Units
• 2008 iPhones: 717,000 Units vs 2009 iPhones: 5Million Units

Actual June quarter 2009 Unit Sales:

• Macs: 2.6Million Units
• iPods: 10.2Million Units
• iPhones: 5.2Million Units

Now, with Macs expected to be roughly the same in terms of units and iPods down year over year, the real growth story is the iPhone. A year ago, there was incredible pent-up demand for the iPhone 3G, which led to the units sales figures in 2008 for the quarter. This year, analysts are far more optimistic with the iPhone, and have already had some help as Apple announced first weekend sales figures of the iPhone 3GS at over 1Million units.

While those 3 major product lines represent the bulk of Apple's cash creation business, not to be overlooked are the percentage of revenue that is derived by iTunes, the AppStore, Software and other accessories. Last year the Music, Software and Other categories of Apple's business represented $1.76Billion in Revenue.

Revenue Breakdown for June quarter 2008

• Macs: $3.60Billion
• iPods: $1.68Billion
• iPhones: $419Million
• Music, Software and Other: $1.76Billion

iTunes continues to grow as the online music destination and the AppStore which had no presence a year ago has gone on to become the biggest software platform in the world today with over 1.5Billion applications downloaded. Yes, most applications sold are "free" and Apple makes very little profit from this even with its 30% share of Revenue, but this drives adoption of iPhone and the more expensive iPod Touch units which drive margins higher.

While it will be hard to maintain gross margins of 34.8% given price cuts on the Mac line and the back to school iPod Touch promotion, it is possible for Apple to maintain these levels given the increased presence of the iPhone in terms of Revenue and Profits.

Total iPhone units sold to date represent 21.17Million Units and with another 5Million units estimated in this quarter it'll bring the total to about 26Million units sold to date and given Apple's deferred Revenue accounting this running total is very important as all iPhones are still contributing 1/8th of their sale price to this quarterly report.

WC Power Tech Fund Investment Blog Revenue estimates for Apple's Quarter:

• Macs: $3.3Billion in Revenue vs. Actual Mac Revenue of $3.329Billion
  
• iPhone: $2.1Billion in Revenue vs. Actual iPhone Revenue of $1.689Billion
  
• iPods: $1.25Billion in Revenue vs. Actual iPod Revenue of $1.492Billion
  
• Music, Software and Other: $2.1Billion in Revenue vs. Actual Other Revenue of $1.827Billion
  

All told, $8.75Billion in Revenue, given similar margin treatment as a year-ago, which brings profits on 890Million shares outstanding to the $1.40/share level. If this is similar to what Apple officially brings to the table today after the close, the bulls on the stock, will have something to continue to cheer about, despite the increasingly hollow guidance-chasing game.

Apple's results:

• $8.34Billion in Revenue
  
• $1.38 Basic EPS (890Million Shares) & $1.35 Diluted EPS (909Million Shares)

Disclosure: Author owns AAPL.

Console Makers battle for fans taking over Gaming Expo

Video Games and Movies, the two business channels that were least hit by floundering worldwide economics. Box Office receipts and attendance are at or near records and the growth of gaming, while pausing slightly, still stands out as a tech sector on the rise. With gaming options like Nintendo's (NTDOY) Wii & DS, Apple's (AAPL) iPod Touch & iPhone, Microsoft's (MSFT) XBox and Sony's (SNE) Playstation 3 & PSP the kids (and ever increasing adults) these days have choices aplenty.

The Electronic Entertainment Expo goes on as we speak and it has been an interesting couple of days with keynote speeches by the big 3 console makers; Microsoft, Nintendo & Sony. While its been common knowledge that Nintendo and its motion controlled & causal gamer placed Wii has been the big winner in this generation of the console wars, with NDP data showing it outselling the XBox by 2:1 and the PS3 by a factor of 2.5:1 lately, the true test is likely to be longevity.

It's no surprise that laggards Microsoft and Sony had to deliver something to excite fans and developers in order to gain traction against Nintendo. It was the folks from Redmond up first yesterday with a keynote speech that excited not only the XBox faithful but fence-sitters alike.
Not only was the XBox opened up for several applications including social networks Twitter and Facebook and music streaming service Last.fm, it also introduced several enticing games and a entirely new control system.

It was the control system that garnered the heaviest reaction. "Project Natal", as it was coined, gives players a way to become the controller for their games. A camera system with facial and voice recognition follows a player's movements and can translate them onscreen for gaming interactions. The Microsoft team showed off several demos, straight out of Minority Report, of the "still-in-development" technology but it was very promising and it goes completely the other way from Nintendo's popular Wii motion controls. A development high-point for Microsoft in the gaming world? Or would Sony steal some thunder with their own announcements just a day later?

Sony's day had arrived and the company had several announcements to make, first a foremost another handheld system, dubbed the PSP Go. Sony will continue selling its existing PSP which has slowly but surely been selling very well for the company (although not as well as Nintendo's DS line or Apple's iPod Touch). With this new version Sony is going to full digital distribution for games and media making it a direct competitor to the aforementioned iPod. With 16GB of storage it undercuts the iPod's price by $50 ($249 vs $299).

Not to be outdone, Sony also jumped into the Motion Control business with a new controller. Internet outlets were quick to praise Sony's efforts as the motion control (based on a similar technology as Hollywood CGI & Motion Capture) allow the player to use the controller for a vast spectrum of game situations with incredible control accuracy. One of the demos showed off how to "air-write" with the controller, with incredibly precise results. The difference between Sony's and Microsoft's new controller entries is that in Microsoft's case the player actually need a controller to play.

Along with an army of popular game developers, both Sony and Microsoft made their case to the video game community that they are not only in the business to try and win and despite Nintendo's early lead, but also want to allow this generation of console hardware to still go strong. If today's announcement are any indiciation there's plenty of innovation left in the space. But what does E3 have to do with Investing?

Sony, despite its size is a vast gaming operation, and with the company posting its first yearly loss, it needs the Gaming operation to deliver incredible results in the years going forward. This will not happen without 1) Exciting innovations in the hardware (and lower costs) and 2) Developers excited about making games for that hardware. Sony has been in 3rd place in console sales since the PS3 launch but it has a long lifetime committed to the platform and even still sells a lot of PS2 machines. The bet on Blu-Ray as a standard will be debated for a long time as to whether it helped or hurt the PS3 in its early years, but the fact remains that Sony still loses money on each sale. The one thing consumers are clamoring for they still haven't received with the machine and that's a deeper price cut! Until it can cut those costs, Sony may simply have to suffer through more months at number 3 on the sales charts.

But with an upcoming stable of games, the new PSP Go and an impressive Motion Controller demo Sony is hitting the right track with Gamers and Developers, and Sony's stock followed suit with a gain of over 2% to close at $28/share.

Microsoft on the other hand, prints money from Windows and Office and doesn't really need a Gaming division, or does it? It in fact needs the XBox to succeed now more than ever for one simple reason. Image! Microsoft has a huge image problem amongst the computer using youth, with a floundering Windows Mobile team being eclipsed by Apple's iPhone, the disaster that was Windows Vista opening the door to more mainstream Mac usage, and the ignorance of anything related to Search the company can come up with due to Google's dominance in the area. This "Old-man's" Microsoft, being out-innovated by hipster companies will eventually trickle down to its core businesses.

The devices group may be that saving grace, while the Zune hadn't exactly lit anything on fire, the original XBox was a good start that has picked up steam with the XBox 360. The innovations of Project Natal, specifically the player controller, are the kinds of things the computer buying youth can get excited about, and once you've got them, if Microsoft can link the XBox brand with the Microsoft corporate image, a Windows user may come back or emerge. Microsoft stock was up about 2% on the day of its E3 speech and sits at $21.40/share.

While Video Games may have been child's play in the past, this business is as important as ever and some of the biggest tech names on the planet rely on a little old conference to reshape an entire corporate vision. Maybe its time to put a little stock into what things like E3 and those who attend have to say.

Disclosure: Author owns AAPL, holds no position in any stock mentioned.

Consumer Confidence outweighs Housing Prices as Markets Rally

US Markets found themselves on the buy side up between 2 and 3% at the last hour of trading as stronger consumer confidence data triggered a surge of bids in morning trade. The Consumer Board's confidence index rose to 54.9 in May from a 40.8 reading in April and this jump was enough to get investors to shrug off another rather negative housing data point.

An S&P Index of Housing prices reported a decline of 19%, details at CNBC (Link), which was the steepest drop in the reading's history. Foreclosures, economic woes, and increasing supply dampen prices all are contributing factors to the decline, however, as these prices bottom, investors clearly see a bottom forming with the terms "housing affordability" and the like being tossed around.

The increase in consumer confidence was a heavily watched metric that started the market's rally in the early hour. The forecast for confidence was pegged at around 42 and May's reported 54.9 mark handily trumped that, leading to a flurry of buying activity.

As for other market news, Technology was a main driver, primarily led by an upgrade of Apple (AAPL) shares. One of Apple's skeptical analysts, Katy Huberty has finally changed tunes, with an upgrade and a substantial price target raise from $105 to $180. The Morgan Stanley analyst has had an appalling record of late predicting Apple's quarterly results, at one point being rated the "worst" in terms of estimate accuracy in research amongst 8 top Apple analysts, which is why her bearish tone had attracted far more skepticism than that of RBC Capital Market's analyst Mike Abramsky (He too however recently changed his tone as fears of Steve Jobs' sabbatical lasting indefinitely have subsided for the time being).

The reason for the change of heart, that ever popular iPhone, which by all rumour accounts is due for an upgrade during the WWDC event the company will host in early June. While speculation runs rampent about just what features will be included in new iPhones the sheer numbers just dont lie. Over 30Million iPhone/iPod Touch buyers downloading 1Billion applications creating a massive, and massively sticky, software distribution and upgrade cycle.

Apple shares have double the Nasdaq advance rising over 6% in late trading.

Disclosure: Author is long AAPL

Technology Market Leadership Part 2: Apple beats again

With the Nasdaq pacing the other market indicators throughout the trading day, it was clear that Technology was on the mind of most Traders.  With eBay (EBAY) reporting numbers to an enthusiastic response, next in line was the mighty folks from Cupertino, waving their iPhones and Macs, sans Legal Copy (If you haven't seen the latest I'm a Mac ads you are missing out on high comedy).

For Apple (AAPL), this quarter was met with tempered expectations.  Charts and Graphs flew across the Internet, projecting the sky was falling for the Mac.  Well not exactly falling, but some rather large chinks in the armor were showing.  Microsoft (MSFT) ads that actually garnered praise! Mac sales at a year over year drop for the first time since 2003! Apple not in the fast growing netbook Market! Pres, Androids, Berrys aplenty! Where's Steve?  I think you get the gist, a lot of shouting and hand waving by analysts and the media, some thoughtful, most not so much.

Even, Apple's number 1 business fan, CNBC's Jim Goldman, in a recent piece was comparing Macs to PCs on price and intangibles, made a point to mention that Macs come with Photoshop!? Perhaps a confused slip of the tongue but nonetheless tried and true stockholders are wondering if anyone outside the Apple circle truly understands the business. And in all likelihood, that's the reason the shares are so under appreciated and victims of manipulation and rumor.

But there's a little something called cold hard facts, and Apple's been providing them aplenty, quarter after quarter.  And with that, providing what seems like quarter after quarter of what I like to call 2/3rds guidance. When will the pros just forget about those last two sentences in every Apple press release.

But now to the hard hitting stuff, the news that matters, the numbers.

• Revenue: $8.16Billion vs $7.7Billion expected
  
• Earnings: $1.33/share vs $1.09/share expected
  
• Mac Units: 2.2Million vs 2.1-2.2 expected
  
• iPod: 11Million vs 10Million expected
  
• iPhone: 3.8Million vs 3.3Million expected

That's as clean a sweep across the board as you can see.  The worrisome figures for most coming in was the Mac line, however this business is on solid footing now as the recent desktop line upgrades start to bring in repeat customers while the popular MacBook designs continue to impress laying Mac styling in front of and towards the general public.  In an economy where the most popular computers across the board are $300-$500 netbooks, Apple is doing very well at its "premium" price points.  The upgraded Mac Mini and the last generation MacBook give Apple some penetration in the sub-$1000 market.

iPhones continue to be big, and not only for Apple.  Analysts were scrambling to revise their iPhone estimates upwards as AT&T (T) reported very strong wireless results as part of their quarterly report.  With 1.6Million iPhone activations (only 300K less comparatively to the holiday quarter) AT&T was quick to point out that iPhone subscriber churn is extremely low (customers love their iPhones) and iPhone ARPU was 1.6 times the average (customers love spending on data plans).

Basically the iPhone's little sister, the iPhone Touch continued to increase in popularity as the AppStore has proven to be an incredible driver of not only adoption, but also loyalty.  With Apple about to cross 1Billion applications downloaded this marketplace becomes the fastest growing software distribution channel in history.  With combined iPhone and iPod Touch sales totalling 37Million units and counting, the install base for developers is only continuing to grow. And as Apple readies the reported and rumored "iPod Touch HD", their curveball into the netbook/tablet market, be sure it'll be accompanied by an AppStore of its own.

How did Investors react to the news? At first nonchalantly, Apple sold off late in the day as worries seemed to creep into the stock.  After-hours however a 3% gain on solid results but sluggish guidance.  The guidance number was partially explained on the call, which I'm sure has yet been properly disseminated.  Apple is recording no Revenue from iPhones sold after their March event of iPhone software 3.0.  This is all due to some technically complex accounting rules that allow their subscription based model to yadda yadda yadda (Insert Legal Copy). In a nutshell, by doing this they can legally give iPhone users the upgrade for free.  iPod Touch users however, are stuck with another Hamilton (Doesn't have the same ring to it as a Benjamin does it?).

Since the software is set to come out in June, that's essentially an entire quarter of 0 recognized iPhone revenue.  Kinda sounds like it fits nicely in the gap between Apple Revenue guidance and Analyst Revenue expectations doesn't it? Provided that the analysts have finally deciphered the enigma code that is Apple's subscription accounting method wherein all iPhone revenues, profits etc are split amongst 8 quarters while the rest is deferred into an ever increasing cash pile which at the moment stands at $29Billion.

To be fair, Apple has begun giving Non-GAAP accounting to try to set Wall St. straight.  And by those metrics, the earnings are just staggering.

• The Current Quarter: $1.84/share
  
• Last Quarter: $2.58/share
  
• Quarter before that: $2.74/share

So the last 3 quarters of "real" earnings paint a picture of $7.16/share in earnings for a stock priced at $125. That's a P/E of 17 in 3 Non-GAAP quarters!  Considering the $33/share in cash that Apple holds, that 3-quarter P/E ratio falls to 13. Looking ahead to the next quarter on a Non-GAAP basis and Apple is likely to earn close to $9/share (vs a comparitive estimate of the GAAP earnings of about $5.55/share).

This company is still undervalued, and while their entry into the netbook/tablet space will be closely watched, so will be the return of CEO Steve Jobs.  Rumors and stock market games aside, Apple is an incredible money printing design house and because of its accounting rules it still seems "expensive" to some.  An injustice that will hopefully be corrected as next-quarter analysts will have a full year of Non-GAAP numbers to look over and use in their predictions.  Then maybe it'll be Apples to Apples.

Disclosure: Author owns AAPL, T, holds Call Options in MSFT

A Tale of Two Cities: Easter News and Notes

A tale of two cities, screams to be profoundly appropriate in describing the current climate of the American markets. Those two cities of course would be Detroit and New York. Symbols representing two pillars of the American workforce and economic prosperity. Both the auto and financial industries have been decimated by losses, layoffs, and market indifference, producing for some, the biggest market fall since the crash associated with the Great Depression.

Detroit's auto stocks are still in tatters, and the news did not get much better. The US Treasury has provided General Motors (GM) with a specific set of instructions for the preparation of Bankruptcy on June 1. It looks less and less likely that GM will be able to avoid that scenario and Investors showed no confidence in any alternative as Monday's trade saw GM give back 16% to the $1.70s.

To counter that, New York was having a fantastic session as the optimism from the Wells Fargo Corp (WFC) pre-announcement of profitability sustained financial momentum. With important earnings announcements upcoming, Goldman Sachs (GS) and Citigroup (C) Investors are seeing a renewed confidence in not only profitability, but the ability of the government to do what it has set out to do. Rid the financial books of terrible assets.

Analysts estimate Goldman to earn about $1.30/share, but the street has begun its whisper-practice and with Goldman still seen as the strongest of the Wall Street brands the company is expected to beat its own number and handily. Citigroup, having alerted the market to profitable months in January and February is looking to continue, despite the accumulated average estimate of a $0.37/share loss (according to Yahoo finance). Goldman will likely set the tone for the banks, and if others in the sector can surpass their estimates it will go a long way to support this current market rally, and instill the type of institutional confidence that is needed to make the latest gains sustainable.

Also in the news over the weekend, besides a thrilling Masters golf finish, was reporting from the Wall Street Journal (Link) that Apple's (AAPL) iconic CEO Steve Jobs, is in fact still very much in the picture and involved in design and business decisions. Word is that Jobs was very much involved in the interface of the latest iPhone OS, version 3.0, and is also involved in the creation of the much-heralded Mac tablet/netbook device. The return of Steve Jobs, from a 6-month medical leave has been a cloud over Apple's stock despite sales growth and product innovation from the company. The recession may have curbed consumer spending habits severely, and Apple's premium brand did suffer, according to market research statistics, but with the company continually improving its Mac Computer and iPods lines recently and an upcoming iPhone announcement surely in June, Investors have begun to set aside worries about Jobs.

Should Jobs return on schedule and lead the next phase of iPhone evolution, expect resonant cheers and analyst upgrades on the anticipation of the next phase of Apple's product road-map. In fact Kaufman Bros. Shaw Wu conceded Apple's value in his latest report, bumping his price target to $150/share.

News reports of the rally's sustainability have been mixed, with some expecting negative trends to overshadow any glimmers of recovery. Thsoe glimmers however, are due to get brighter if the financial sector continues on this path of pre-announced profitability.

Smartphone Wars to heat up this Summer

The new hotness, no not Twitter, but the smartphone, is gearing for an all hands on deck gadget war this year and beyond. While smartphones have been around for sometime, it was only until recently (read: iPhone) that momentum has picked up faster than Usain Bolt. With two main rivals now leading the charge, Research In Motion (RIM) and Apple (AAPL).

This isn't a 2 horse race however, nor will it be over soon. As RIM executive Jim Balsillie recently said on the company's conference call in baseball terms, the smartphone wars are somewhere in the 2nd inning. What may seem like an Apple and RIM race to win, certainly can be turned upside down with entrants from all of the world. Although smartphones account for less than a third of the phone market, they command nearly 90% of the media coverage and almost all of the growth. According to Mobile Advertising Network AdMob, smartphone share increased from 26% to 33% in the past 6 months. This growth trend seems likely to continue as popularity in these devices continue to gain and subsidies for the most popular devices reign in even the most worrisome economic consumer.

Although Nokia (NOK), may be the biggest phone maker in the world, its smartphones have yet to inspire consumer desires such as the iPhone from Apple or the Blackberry Bold from RIM. Although by sheer volume, Nokia with its range of models holds 3 of the top 5 most popular smartphones spots globally, trailing only the aforementioned iPhone. Trends are shaped by consumer decisions as well as the push from corporate entities, and as such none of these companies are standing still, nor can they afford to.

What's on the horizon then? An analyst at Barclays is reporting that Apple has doubled iPhone production in anticipation of new models coming in June (Link). Recent iPhone speculation has pointed to not one but two phone models expected out of Cupertino this time around, conveniently coinciding with the release of Mobile OS X software version 3.0 in June. When Apple reports results for the first calendar quarter of 2009 it will surely surpass 20Million unit sales for the iPhone, not too shabby in about a year an a half.

With the AppStore becoming a global phenomenon Apple is making it extremely tough for users to ever switch away from an iPhone. If you've spent hard earned money on applications to make your phone function exactly how you want it to and have the features you want, you'll of course be less tempted to switch to something else if it means losing those precious applications. When iTunes purchases only worked on iPods for all those years, it drove an upgrade cycle for the company like nothing the music industry had ever seen.

RIM, fresh off the release of a new Curve, the well-received Bold and the mixed touchscreen Storm, has had information leak out about 3 new devices codenamed Onyx, Driftwood and Magnum. This coming from a company that had shipped almost 8 million devices in its most recently announced quarterly results, sending shares higher by 20%. RIM is certainly hard at work, but its not an easy task convincing the general public the virtues of a Blackberry. Always the device of choice for the business user, as smartphones have become increasingly consumer-focused RIM had a tough balancing act to strive for. For the most part, judging by the results, RIM has done very well. Initial critical thrashing of the touchscreen Storm notwithstanding the device has been successful and further forays into iPhone touchscreen territory by RIM will likely be greatly improved. And not a soul can say negative things about the hardware RIM uses for its keyboards, they are always top-notch.

Palm (PALM) has somehow starting erasing its name from the gravestone it was surely destined to have after several quarters of significant losses. The driving force for the resurgence! A little device by the name of the Palm Pre. Wowing audiences earlier in the year with iPhone-like admiration, the Pre is set to launch in the US soon, followed by International markets later in the year. There still is much at stake for Palm, but the feedback thus far has been incredibly positive on the new device, and with the work put into Palm's WebOS platform the company, and consumers, expect a wide range of WebOS devices going forward.

Google's (GOOG) Android has had a rather slow start but will likely pick up steam in the latter parts of the year as not only a second handset from HTC, the company that produced the G1 for T-Mobile, is due as well as multiple devices from Samsung. With carriers in the US and abroad looking at, adopting, and testing Android, it seems only a matter of time before Google's vision of hundreds of Android phones becomes a reality. T-Mobile is even talking about launching Home phones and netbooks running Android, and a recent story about HP had the company confirming it will be testing Android for its netbooks. The free, open-source platform has proved resilient despite some questionable early roots, and as the platform stabilizes and is available on more handsets and in more incarnations consumers will increasingly see Google's web based products, and ads, within their mobile world.

Like Google, Micrsoft (MSFT) has only been providing software for smartphones, however all the momentum a bloated Windows Mobile has garnered in the past has seemingly been lost in the past year. With flashier devices like iPhones, Blackberrys, Androids and Pres being on consumer minds the battle remains uphill for Microsoft. A software overhaul is needed for Windows Mobile and it certainly doesn't help the company that it announced a visual overhaul (Version 6.5) but slated it for release at the end of this year, while a proper, better Windows Mobile 7 is scheduled to come sometime in 2010. Microsoft can't afford to wait much longer as Android gains momentum, and while the other most popular smartphones all run their own platforms.

All in all, consumers will have an abudance of choice in 2009 and beyond, and as their devices do more things they need, the world as we know it will change from the at-home/at-work Internet dominated era to the mobile/on-the-go Internet dominated era. The one constant is being connected and with each software platform making a better Internet experience each time around the debate surrounding Internet browsing is fading. The only way to get ahead in this game is to bring incredible new features (such as 3rd party applications) wrapped in elegant hardware that consumers feel inspired to purchase and use. While Apple and RIM are leading in that sense now, by the time this year's crop of devices are released we may just be nearing the bottom of the 4th.

Disclosure: Author owns AAPL, GOOG, owns long-term call options on MSFT

...And now starring Tim Cook as Steve Jobs plus a look at Apple's Quarter

In a memo that spread throughout the press like wildfire, Steve Jobs, CEO of Apple (AAPL) announced that he'd be stepping away from day to day duties to focus on his health issues. The iconic CEO cited further complications in this treatment to fix a protein irregularity along with the fact that persistent rumors about his health becoming a distraction to Apple's current management team.

The media back-and-forth had gotten so bad and become such a distraction that it forced Apple and Steve to release a letter to the "Apple Community" describing briefly about his personal health issues in an effort to reassure Investors that the company was not only in good have but had Jobs for the foreseeable future. That future got murky very quickly in after hours trading with Apple shares falling 5% on the news of Steve taking a 6 month leave of absence.

And the media back-and-forth continues, as several pundits are calling Apple out for not being open enough in disclosing the true nature and severity of the health issues Steve was facing. While Apple's corporate line of a "constantly evolving" situation with Jobs will hold under most scrutiny it will not come as a shock to anyone if the lawsuits start piling higher at the desks of Apple's counsel. As share prices have eroded in the last 12 months and with Apple sitting at $80/share the $190s seem like a distant memory, and while much of decline is attributable to general market and economic factors the haze of doubt over Steve Jobs, his health, and his ability to continue on as CEO, contributed a meaningful part of the sell-off.

The memo from Jobs concludes with the friendly "see you all this summer" send off yet many outlets are skeptical of his return at all. Apple it seems has been prepared for a transition for some time. Over the course of the last year, several Apple product events have had Steve share the stage with others in an effort to showcase the brilliant team Apple has surrounded Jobs with. This was most notable at this year's MacWorld conference in which Marketing guy Phil Schiller took the stage for the keynote speech. Taking the company reins during the 6 month term will be Tim Cook, who's very familiar with all aspects of the company due not only to his Operations experience but the fact that he took over as CEO when Jobs had surgery in 2004.

Apple's product standing among consumers is the highest it has ever been with 4 major lines of business becoming part of every day lexicon (iTunes, iPod, iPhone, Macs). And with analysts trimming estimates and cutting price targets left and right something seems to be amiss. Economic stresses have weighed heavily on Apple as its upscale products tend to carry higher price points as compared with other companies. But here's the kicker, analysts expect higher unit sales than last year for the company in virtually every business category yet expect Apple to earn significantly less per share.

The company guidance from last quarter was no real help as a range of just over $1 to the $1.30s was alarmingly low for the Street. While current consensus stands in the $1.40s-$1.50s that is still off the holiday season of 2007 in which Apple posted $1.76/share in earnings and $9.6Billion in Revenue with a higher than anticipated gross margin of over 34%.

For the current frame analysts expect Apple Revenue on average at $9.85Billion and a gross margin in the 31-32% range slightly above Apple's own forecasts.

Last Year sales:
-> 2.3Million Macs - $3.5Billion in Revenue
-> 22.1Million iPods - $4Billion in Revenue
-> 2.3Million iPhones - $240Million in Revenue (Rest Deferred)
-> Music Sales - $800Million in Revenue
-> Other Hardware - $380Million in Revenue
-> Software Sales - $630Million in Revenue

All of the above translated into $9.6Billion in Revenue for the quarter with gross margins of 34.7% and income of $1.58Billion for a net profit margin of 16.5%.

Estimate Ranges for this year from analysts include:
-> 2.5-2.8Million Macs, led by the refreshed line of MacBook models
-> 18-21Million iPods, likely with a higher average selling price due to the popularity of iPod Touch
-> 4-5.5Million iPhones, down quarter over quarter due to the previous quarter 3G launch and the in-store activation policy for which gift cards were issued instead of iPhones.
-> The growth in iTunes digital music sales continues to be strong and the AppStore has become another line of business for the company with over 500Million Applications for iPhone and iPod Touch already downloaded.
-> Other hardware and software sales will likely be lower but in similar ranges, with any declines to be made up by the growth in iTunes and the AppStore.

So some quick accounting for Christmas 2008 for Apple:
-> The Mac business with 2.6Million units (0% quarter over quarter growth) at a similar $1500 average selling price translates into $3.9Billion in Revenue
-> The iPod business with 19.5M units at a higher average selling price near $190 translates into $3.7Billion in Revenue
-> The iPhone business selling 5Million this quarter and with 18Million units deferred at an average selling price of $400 becomes $900Million in revenue
-> The iTunes store, AppStore along with AppleTV etc becomes close to $1Billion in Revenue
-> Other hardware and software could fall to $800Million

Total Revenue estimates for Apple on this end come out to $10.3Billion and with a 2% gross margin drop the income calculation would be close to $1.6Billion in profits and per share earnings in the mid $1.70s. Year over year flat profit growth given Apple's product momentum paints a somewhat conservative picture to some, however given the current economic environment it still bodes very well given current analyst expectations. With analysts citing slowing demand and a weak economy the numbers just don't seem to add up for a Christmas quarter with Apple earnings in the $1.40s, however even in very pessimistic scenarios a drop of $0.30/share in earnings from the above estimate still beats current expectations.

While all Apple faithful wish Steve a speedy recovery and all the best during his treatment, the company is indeed in good hands and can still outperform the competition in the months to come. With Tim Cook at the reigns now the company has seemingly played its transition team cards and can move Steve Jobs into more of an oversight role with Tim behind the day to day reigns upon his return. The fact that Apple has such a competent and capable management team has always been overshadowed by the charisma of Jobs but perhaps in his absence the continued quality of Apple products will shine through and others behind Jobs will get the credit they rightfully deserve.

Update: January 16, 2009 Apple announced 500Million Application have been downloaded from the AppStore.

Disclosure: Author owns AAPL

Apple's holiday quarter shackled by Good problems, high iPod demand

When Steve Jobs came on Apple's (AAPL) conference call the last go-round it was designed to put analysts and investors at ease. That it did, his presence calmed questioning and glossed over a then shockingly broad and conservative forecast for the holidays: Earnings of between $1.05 and the $1.30s per share of Cupertino fruit.

Introducing the Non-GAAP method for earnings was equally brilliant and needed, as analysts couldn't shake their traditional valuation methods of the company. The curve ball thrown by the iPhone's subscription accounting led to steady devaluation of the company stock, which then was taken brutally by the whirlwind of economic turmoil alongside the market. Bullish Cross (Link) did some of the most notable work recreating Apple's earnings for FY2008 putting "actual" earnings at around $7.50 vs the $5.36 reported in the standard GAAP way. A difference of over $2/share in earnings and about $40/share in price at a P/E of 20.

However, this subscription method which undervalued the company tremendously during the early stages of the Bears, will help propel the company forward in the troublesome economics that exist today. Steve's worker zealots could completely take the holiday months off and still count 1/8th of a year and half of the incredible selling iPhone revenues and earnings. But Apple folk aren't taking any time off and the expanding retail chain will be busier than ever this Christmas. Unfortunately it appears some of the company estimators forgot 2 important facts when placing Christmas build orders.

1) Apple products are hotter than ever and
2) People buy iPods as gifts no matter what

According to some work by long time Apple researcher Shaw Wu, Apple's experiencing wide shortages on iPods of all shapes and sizes. While analyst work can fall into several quality categories, most notably the work done by Gene Munster is always carefully calculated, checking shipping lead times on several web sites just doesn't qualify as ground-breaking research. It does however provide a simple barometer for demand if the sites you're checking happen to be some of the biggest in America (Sites like Amazon.com, Best Buy and Wal-Mart). As an aside, Wu, has been a constant on the Apple analyst providing reports to clients almost constantly.

When these retailers are showing shortages of select colour/storage combinations and long shipping times of other models it does qualify as cause for concern. Did Apple ship pessimistically along the lines of its forecast? Did it simply underestimate strong demand for its ubiquitous music players?

I believe the answer lies somewhere in the middle. Apple is being incredibly prudent in its cost controls these days, and after revealing to the world its new line-up of MacBook and MacBook Pro laptops and their new all-aluminum design process the R&D costs are aplenty. Couple this with the on-going work on the next version of its operating system OS X Snow Leopard, which is expected in early-mid 2009, iPhone/iPod Touch continuous software updates and whatever surprises are in store for MacWorl 2009 in January and some cost prudence is almost a necessity.

The company may have overshot it though in assuming current economic conditions would make the $230-$400 iPod Touch a tough sell. The reality is that the "Funnest iPod Ever" is performing exceptionally well and there are several reasons for it. Apple's online store has plenty of stock and has the Touch as a top seller. The App Store however, is near the top of the list if not at its peak of reasons to get the Touch. The Software marketplace pushed heavily by the iPhone in all adverts is also on and available for all iPod Touch devices, making the device far more than an iPod. As for the other models, iPod Nanos and Shuffles continue to make a great stocking stuffer year after year.

Amazon.com's list of top selling MP3 players is dominated by Apple, currently holding the top 10 spots, and 15 of the top 16. Dominance like this is incredibly hard to achieve, and even harder to maintain, as Apple has now done for the last several years. So with that research in hand, Wu's estimates call for 21Million iPod units to be sold, a little short of last year's record of over 22Million, but nonetheless a very successful holiday given current economics. Given the premise of over 20Million iPods, driven primarily by iPod Nano and iPod Touch devices, the logical thing for analysts to do would be to project a very healthy stream of iPod related revenue and earnings in the quarter.

Analyst conclusions on iPhone sales also represent the type of growth the company saw in the early years of the iPod rise. Last year's 2Million+ unit number is expected to nearly triple through the combination of in-store activations and iPhone specific gift cards. Corresponding AppStore sales will also be ready to incline in step, thus its safe to say the phone division is on solid ground for 2009. If China ever gets works out, the addressable iPhone market could potentially growth by another 600Million users.

So, all that's left for Apple to do is to prove the new Mac portables are as popular as they've started out being and you've got a company that will spend another conference call giving each other "corporate-speak" high fives, trying to step around analyst typical questions on how Apple bucked all these devastating economic head-winds. Year ago earnings of $1.76/share seemed so far away during the conference call and its accompanying guidance. With these latest analyst reports there is plenty of room for the consensus estimate to move higher.

The Vegas Line stands at $1.46 and I expect it to move to the 1.50-1.60 range as Jolly Saint Nick nears.

Disclosure: Author is long AAPL

Apple eyes Successful Holiday Season with new Mac Notebooks

As per the norm, rumor-mills were ablaze with blurry photos, leaked specs and incredulous claims about Apple's (AAPL) upcoming surprises in the computer space. Just about a month after it refreshed its iPod line for the school and holiday seasons the Mac maker returns to the stage to unveil an entire new line of laptops, with enough bells and whistles and marketing glam to gleam into the eyes of affluent America regardless of those pesky "economic headaches".

Will it be enough to satisfy Investors and bring ever-increasing tight-wallet parents out of the woodwork and into Best Buy (BBY) or Apple retail stores?

The run-down of new products, in short prose will follow, as they'll cleverly be splashed across technology publications all day and likely all week. The important thing however is that Apple is using the rumored "Brick" design process to make cases for the entire laptop line. A process that is able to carve an aluminum case for each laptop out of a block of metal, saving all excess to be reused in the process at later stages, this is in fact not a wasteful process at all. Apple getting high environmental marks for its latest products is also a change for the company over the course of the last couple years. The new laptops also now have glass track-pads without individual buttons. A new feature of today's laptop line is that the glass track-pad acts as a button and introduce more multi-touch capabilities including 4 finger actions. Not to mention the innovation of having its Pro line of laptops driven by not 1 but 2 graphics cards, that can be turned on and off for better battery performance or better hardcore video performance.

But without further delay:
-> MacBook: Original White Model price drop to $999. Apple just barely entering the sub-$1000 market, it may not be enough to convince analysts but the $999 price point is nonetheless an actractive one for the core Apple market demographic and engaging those further beyond it.
-> Aluminum MacBook: In 2 configurations at $1299 and $1599
-> Refreshed MacBook Air: In 2 configurations with spec bumps at $1799 and $2499
-> Aluminum MacBook Pro: Multiple configurations for 15" and 17" models: 15" models in 2 configurations at $1999 and $2499
-> Apple also introduced a new 24" Display for $899

So, now that the current round of rumors may be put to rest, what does the future and the holiday season hold for Apple. By all accounts of the crowd at the notebook event, the reactions to the new laptops was very positive. Will the $999 MacBook continue to be a best-seller or will Apple have to dive deeper into netbook price territory?

It is my belief that Apple's brand has for years developed a premium stigma to it and that the design prowess of the company can not be underestimated. While other computer makers may struggle with economic conditions, putting pressure on margins, Apple's pressure is offset by its current target demographic, which mainly consists of youths with disposable cash and many parents of that youth segment. Apple made big points in its presentation today about its growth in the retail segment of the US and its market share gains across college campuses. This will resonate in the years to come as well as the short term. Of all those feeling the pressure of an economic slowdown the last truly feeling the pinch will be the more affluent and wealthy of which Apple demands a significant amount of technology/gadget attention with its iconic product line of iPods, iPhones and Macs.

That is not to say Apple shares wont feel the pressure, in fact Apple suffered as large a drop as any large tech company over the past month as fear of consumer spending shortages spread throughout markets. With Apple the volatility comes with the secrecy and the cult-like following. But markets, as forward-looking as they are generally aren't wrong for very long.

Apple is expected to reveal quarterly results on October 21st following a quarter mixed in terms of news coverage, events and economic activity. While it is a big back to school season for Apple at this time of year, analysts and Investors are fearful that the economic uncertainty facing the US could have had a significant impact on casual spending. Apple has proven to be recession-proof in the past but the company will have to prove itself again with results, and prove itself yet again with guidance that doesn't scare off the institutional buyers.

Till results are revealed, Analysts, Investors and Fan-Boys have a brand new slate of Apple laptops to go and check out at Apple stores all across the country.

Disclosure: Author owns AAPL.

Apple in the Bargain Bin around $100

Tumultuous turmoil in the marketplace has left Traders and Investors on a selling spree as the US Financial crisis spreads through the credit markets and begins to lurk in the nooks and crannies of Main Street economy. While several incredibly leveraged and debt-ridden names deserve to be under the knife of their own implosion other great companies are just being swept into the sandstorm of negativity. Apple (AAPL) is surely one of those names!

Granted, Apple was and may still be a high P/E stock and as markets contracted of late, Apple's multiples have moved in kind, despite the company's growth outlook. The supplementing downgrades near this latest bottom offer a hope that this is a bargain basement price for this still solid growth company. When analysts start piling up the downgrades like Morgan Stanley and RBC did against Apple yesterday, during the Market's worse point loss, its time to reconsider that this may in fact be a bottom.

Coupled with the White House push to get some sort of Bailout Plan passed through Congress and you've got a recipe for a potentially big turnaround. Let's take a quick look at the Apple "downgrades". The RBC analyst cut his Mac sales estimate from 3.0Million to 2.9Million units, which all things considered is still a stunning sales pace when a year ago the company shipped just over 2.1Million Macs. iPhones sales estimates, well RBC actually rose those from 5Million units to 6Million units in the quarter.

As the 3rd iPhone rollout begins, which in early October should include Russia there is very little, if any, doubt now that Apple will blow past its own goal of selling 10Million iPhones this year. It's also poised to be a 10Million Mac year, which of course will be a record for the company, not to mention the 10+Million iPods shipped every 3 months. With Apple holding an iPod event earlier this month to announce new Nanos and reduced pricing on iPod Touches the company wants to place itself within a comfortable range of consumer spending, even as that spending starts to deteriorate.

While its true a new computer favourite with consumers is the "net-book", the small screened sub $500 machines for the budget-conscious shopper on the go, but even as Apple gets more mainstream with its computer business it is still a premium niche design brand. Tiffany's doesn't suddenly start selling cubics does it? Brand recognition and popularity especially among the youth market is critical to businesses in a consumer downturn and Apple has it. All signs earlier in the quarter have pointed to a record back-to-school shopping season despite economic perils. Not to mention Apple's own claims of margin-cutting new devices coming soon, which likely include either lower priced entry laptops or the ever-rumored Tablet device.

The iPhone is the next big growth phase for Apple, as iPod users upgrade/replace existing iPods with new models or iPhones, the company will continue to see the incremental revenue from not only those device sales, their booming iTunes online music business, but now also from the sharply growing Application download business. The latter of which, providing $30Million in revenue on its first 100Million downloads in the first 2 months of operation.

As Apple's quarter comes to a close, earnings are right around the corner and as always analysts will be looking towards guidance more than anything. This is where Apple's biggest problem may be. Given the current economic climate Apple's typical lowered and comfortable guidance may hurt more now than it would help later. The important thing to remember with Apple's upcoming results is that its future is sound, with 10s of Billions in cash and deferred revenue from iPhone sales the company isn't looking at any debt, has the flexibility to still innovate and negotiate tough economic climates, especially as it captures the press in another "Steve-note" later in October to unveil new lowered price MacBook and MacBook Pro laptops (as the rumors go).

But consider this. After this quarter, cumulative iPhone sales will likely be close to 11Million units, and at $400/device on average (pre-subsidy) that's close to $4.5Billion in revenue of which an 8th will show up on this quarter's books, $550Million. When you consider a year ago Apple had total sales of $6.2Billion for the quarter, the iPhone piece is becoming ever more significant. And when Investors think about the additional $4Billion that will be padding Apple's cash horde in the upcoming quarters it will certainly make them breathe easy even in the most crimped economic spending scenarios.

Apple's cheap, it's a steal, and there are very real catalysts in the next few months (Earnings, Mac Event, Christmas Sales, MacWorld, Christmas earnings). This is a stock that could climb 50-60% from here in the next half-year.

Disclosure: Author is long AAPL

Morning Market Musings 8/28

As the Democratic Convention rolled on with another star-studded political night, the morning Markets turned positive from the opening bell. While the majors opened nearly half a percent higher, several news points stood out.

Previous gloomy growth forecasts for the US economy were actually revised higher, as GDP for quarter 2 of the year came in at 3.3% growth versus the initially estimated 1.9%. However this result was propped up by the stimulus package provided in the quarter and economists still expect slowing growth for the rest of the year.

Freddie and Fannie continue their torrid rebound, as the 5 day tally for Fannie Mae (FNM) now stands at a 43% gain, and trying not to be outdone by it's mortgage partner in crime Freddie Mac's (FRE) 5 day tally stands at 65% in gains. As the yells of government bailouts turn into whispers and some optimism the street has rewarded these battered companies by showing Investment support. Quite the turnaround from even just a few days ago!

All is still not well with Sears Holdings (SHLD) as it continues to limp along from quarter to quarter with sales declines. Sears delivered an over 60% profit decline year over year, earning $65Million of $0.50/share all the while adding a gain that without would have pegged earnings at $0.21/share. The outlook? Not so bright either as the company predicted earnings to continue to fall compared to 2007 on a year to year basis.

iPhone comes to Russia via Vimpel Communications. The Russian mobile operator announced earnings earlier this morning and announced it had signed a deal to bring Apple's (AAPL) iconic mobile handset to Russia, being the first official carrier to do so. Russia has always been one of the largest grey-markets for iPhones, having an estimated 600,000 units floating around unofficially on local carriers. With no signs of exclusivity, Apple will likely continue negotiating an eventually offer the iPhone through other large Russian providers.

Disclosure: Author owns AAPL

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