Saturday, November 29, 2014

FY2015: Apple's Big Adventure

On Friday, November 28th, Apple’s share price closed the month’s trading at $118.93, up 9.9% from the opening price on November 3rd and up nearly 10.5% from the opening price on September 29th, the first trading day of the fiscal year. 

Recent analyst revenue upgrades and price target revisions have provided support for the share price. The current Wall Street consensus revenue estimate for the December quarter is $66.23 billion compared to management’s revenue guidance for the quarter of between $63.5 billion and $66.5 billion. However, the current revenue consensus estimate for FY2015 remains a decidedly conservative $210.68 billion and for FY2016 the revenue consensus estimate is a surprisingly low $223.02 billion.

In contrast, my revenue models suggest Apple may reach one-quarter trillion dollars in revenue in FY2016 following a revenue performance this fiscal year of $225 billion.

On November 19th Morgan Stanley’s Katy Huberty raised her firm’s price target from $115 to $126. She stated investors underestimate demand for the Apple Watch and is forecasting 30 million Apple Watches will be sold in CY2015. She also believes institutions remain underweighted in Apple shares. In my view, increasing institutional demand for shares will buoy the share price during the first six months of the current fiscal year.

On November 25th Aaron Rakers at Stifel Nicolaus raised his Apple price target to $130 from $115. On the same day Brian Blair reiterated his firm’s view iPhone unit sales will range between 72 million and 75 million in the December quarter. Although the share price may not go higher in a straight line, I expect a continuing series of analyst estimate revisions over the next several weeks to support the share price into Apple’s December quarter earnings release in late January. 

Looking Back
Although unit sales expectations for Apple’s iPhone 6 handsets are moving higher with strong evidence of a big market share shift in the high-end smartphone market from competitors to Apple, most analysts remain cautious on their FY2015 revenue and earnings per share estimates. 

The graph below illustrates Apple’s revenue mix for the fiscal year ended in September. In the 12-month period, the iPhone represented just over 55% of reported revenue. Combined, the iPhone and iPad lines represented over 72% of revenue in the period.

Saturday, October 25, 2014

Apple’s Magical Mystery Year

On October 20, 2014, Apple announced results for the fiscal quarter ended September 27, 2014 and for the fiscal year that ended the same day. For the fiscal year, Apple’s revenue rose about 7% to $182.795 billion while earnings per share rose about 13.6% to $6.45 due to year-over-year growth in net income and the ongoing $90 billion share repurchase program.

For the fiscal year, Apple set records for revenue and earnings per share. Although net income rose about 6.7% year-over-year to $39.51 billion, the current high water mark for net income was set in FY2012 at $41.733 billion on outsized gross margin. However, Apple may come within striking distance of a new net income record in FY2015 as we watch the fiscal year unfold.

The Trend Is Again Apple’s Friend
The graph below illustrates Apple’s net income on a quarterly basis and the corresponding percentage of revenue that flowed to the net income over the most recent twenty fiscal quarters. 

After a peak of 29.66% of revenue flowing to the net income line in FQ2 2012, Apple’s net income as a percentage of revenue has begun to gradually recover from the nadir of 19.53% set in FQ3 2013.

Since returning to net income growth in the March quarter, Apple’s share price has risen from a split-adjusted price of $74.96 on April 23rd immediately prior to the release of March quarter results to $105.22 on Friday, October 24th. This 40% rise in the share price in six months correlates to the market’s anticipation of rising net income and rising earnings per share amplified by the ongoing share repurchase program.

The graphs below depict Apple’s revenue and earnings per share performances over the most recent twenty fiscal quarters. 

Apple’s Revenue Growth
Apple’s revenue growth rates have moderated since the torrid rates of growth experienced in fiscal years 2010 through 2012. From a high of 66% revenue growth in FY2011, which included the first full fiscal year of iPad unit sales, to about 7% revenue growth in the fiscal year ended in late September, Apple’s revenue growth rates sharply declined over the two most recent fiscal years. FY2014’s revenue growth rate performance represents Apple’s slowest rate of revenue growth in over a decade. However, the revenue growth rate in the recent September quarter of 12.4% to $42.123 billion represents a reversal of that recent revenue growth rate trend.
For the December quarter (FQ1 2015) Apple is guiding to revenue of between $63.5 billion to $66.5 billion. This represents an expected revenue growth rate of between 10.25% and 15.5% in the period. To put Apple’s revenue guidance for the December quarter in perspective, Apple’s revenue total for all of FY2010 was $65.225 billion.