The broad narrative on Apple earnings for the quarter is that the company: A) Missed on most of Wall Street’s projections for them (except iPad and iPod sales); B) Barely beat their own comically conservative guidance; C) Provided guidance numbers for the quarter ahead that are especially conservative; and D) Acknowledged that the slowing global economy is a challenge on multiple fronts.
Unsurprisingly, the stock is down 5% after-hours. But the real question is, 'Buy,' 'Sell' or 'Hold,' right?
To answer this one, let me put forth two salient questions on the topic.
One, is Apple still selling something that the market wants, that customers are willing to pay for when times are tough, and is sufficiently differentiated to maintain high margins?
Two, as a stock, is Apple richly priced, fairly priced or under priced?
Related to this, any analysis of the quarter needs to take note of the fact that the company is in a clear ‘down period’ before the release of the next iPhone.
Simple logic dictates that those who know Apple's product release patterns would default to waiting for the next iPhone, knowing that it’s a quarter away.
Similarly, the same analysis needs to factor that Apple’s newest MacBooks contributed just a few weeks of revenue to the quarter given their date of release.
So, let me attempt to answer Question 1 (Demand + Differentation) and Question 2 (Stock Value) with my four main takeaways from the earnings call:
- Performance is Relative: Apple revenue was still up over 22% year over year to $35B, so the law of big numbers is not catching up to them yet. Moreover, the company shows no signs of margin erosion. Quite the opposite. Margins this quarter were 42.8% vs. 41.7% a year ago, and 39.1% in the year ago quarter before that. Further, iPad is disrupting more segments within the PC market than ever before, as evidenced by Apple’s own accelerating separation in sales of iPads vs. Macs. A year ago at this time, Apple was selling 2.5 times as many iPads as Macs. Yet, in this quarter, that number mushroomed to 4.25 times as many iPads. And we already know that the Mac is outpacing the general PC market, growing 2% year-over-year, vs. the PC, which is shrinking 1% year-over-year. A big part of this is the educational sector, especially K-12, where Apple has intelligently segmented pricing with the $399 iPad 2. Apple CEO TIm Cook was quite pointed in asserting that when people talk about the 'tablet market' they generally mean iPad, notwithstanding the buzz and promise of Nexus 7, Kindle Fire and the Nook. Similarly, iPhone was up 28% year-over-year, and shows no signs of losing its magic with either consumers, the enterprise, or even carriers, especially with the promise of a new iPhone and iOS 6 in the fall. In other words, we can debate if Apple should have WON more, but we can’t and shouldn’t posit that they are LOSING anything anywhere. The iOS platform, now 410M devices strong (45M devices added in the quarter), coupled with iTunes and surrounded by iCloud (150M users), stands alone. (Some great charts on Apple numbers are HERE.)
- The Economy Sucks: One of my favorite moments of the call was when Bernstein analyst Toni Sacconaghi challenged Apple CFO Peter Oppenheimer’s comments about being “pleased” with the quarter, by noting Apple’s various weak spots, and asking Oppenheimer what he wasn’t pleased about. This led to a bit of a 'tell' by Oppenheimer, who stated that, “Given what’s happening around us...” Oppenheimer went on to talk about a weak Europe, struggling economies that are based on natural resources, foreign currency weakness against the dollar, and delays in getting both the new iPad and the new portables into China. In other words, while Apple is quite strong in the US (no slowdown yet), and asserts great strength in China (they have not seen the rumored China slowdown in their business), there was ample acknowledgement that the economic picture is cloudy and getting dark, so much so that Apple’s going forward numbers assume a weak Europe, Australia, Canada, Brazil, France, Greece, Italy and even Germany. That, by friends, is macro risk, something that Sacconaghi, who is bullish on Apple, nonetheless suggests HERE.
- Apple Retail is Flat, but No Alarm Bells: I watch this one like a hawk, inasmuch as retail presence is such a game-changer when it works (product discovery, social confirmation, sales, upsell, and support channel) and an albatross when it doesn’t. As such, I am perennially looking for canaries in the coal mine. Well, here the news is muddy. Same store sales were up a measly 2.8% year-over-year (from $10.8M per store to $11.1M per store). But at the same time, overall sales numbers were up 17.1% year-over-year to $4.1B, and logic suggests that the company still has room for further geographic expansion. For some contrast, in the obviously seasonal holiday quarter, same store numbers were $17.1M (up 43% over the prior year's quarter), but in the more representative October quarter, they were $10.7M, a number that was actually 9.3% worse than the prior year. Do with this data what you will, but it suggests that Apple Retail continues to work.
- Apple Stock Remains Cheap, Getting Cheaper: I have blogged on my 'gold standard' thesis with respect to Apple, so read that post, if interested. The upshot is that there are a small handful of companies that are such bellwethers that their value is almost segment independent. Their only peers are the other bellwethers. Who are the bellwethers? Think: Google, Disney, Nike, Coca Cola, Berkshire Hathaway, Amazon, Southwest Airlines, Procter & Gamble, McDonald’s. Well, after-hours Apple is now trading at 12.6 times trailing twelve-month earnings (per Horace Dediu of Asymco). By contrast, its gold standard peers are trading at 18.54 times trailing earnings, and that’s factoring OUT Amazon’s crazy multiple. Put another way, does anyone think that Apple is even remotely worth only 68 cents on the dollar of its peers? I sure don’t.
- Reality Distortion, My Ass: I have stated this previously, but it bears repeating given Apple’s reputation for secrecy and reality distortion. If you want to find out which company is more open about their strategy, tactics and results, all that you have to do is sit in on an Apple earnings call. Then compare it to a Google, Amazon and/or Netflix earnings call. For example, while Google may fancy itself as the more 'open' company, with its investors at least it generally provides 50,000 foot fly-over views of the business (and Amazon and Netflix are even worse). By contrast, Apple gets surgical, breaking out metrics, segments, margins, channels, etc. Where I come from, WYSIWYG is a good thing, especially where my pocket book is concerned.
- Apple TV is a Nice $400M Hobby: Apple has now sold 4M Apple TV units this year, including 1.3M units in the quarter. That’s up 170% year-over-year, and Tim Cook was candid that Apple doesn’t pursue hobbies where they don’t think there is a 'there' there. Still, nothing in the call suggests that a full-blown TV is on the horizon, and I remain extremely dubious that that’s a business that they should get into, as I have previously written about.
In closing, I'd like to note that I loved Tim Cook’s comment that, “Our (Apple’s) 'North Star' is to maniacally focus on making the world’s best products, and economy aside, we won’t deviate from that...that’s why we breathe, that’s why we live.”
I don't know about you, but I root for companies that aspire for greatness, as I know how few truly do set such lofty goals.
And as an Apple acolyte and frequent investor in the company, I know this isn't Tim Cook puffery. It is Apple gospel, something Cook put a bow around by noting that the company has seen time and again that when companies opt to belt-tighten vs. innovate in tough economic times, the end-result is that Apple puts more distance between itself and the competition.
When you get down to it, that's the Apple story over the next few quarters. To win convincingly by following their North Star, or succumb to Earth's Gravity, and be like everyone else.
- What's Apple Worth? The 'Gold Standard' Thesis
- Understanding Apple's Q2 Earnings: It’s about Value & Integration, and it’s Global
- It’s Time to ‘Think Different’ because Conventional Wisdom is Dead: Thoughts on Apple’s Q1 Earnings Call
- Four things I heard at the Apple Q4 Earnings Call (2011) that caught my attention