Monday, April 26, 2010

Apple's FQ2 Results: A Different View

There are a variety of ways to view Apple's 2nd fiscal quarter results. A classic approach is to primarily review the obvious stats:
For the three-month period ended March 27, 2010 Apple reported an almost 49% increase in revenue to $13.5 billion and an 86% increase in earning per share to $3.33. For the six-month period ended March 27, 2010 Apple has reported a year-over-year increase in revenue of almost 40% to $29.18 billion and a 63% increase in earnings per share to $7.00. 
A different approach to viewing the numbers for the March quarter includes looking at the numbers on a multi-year growth plane. In FY '09 Apple realized about $43 billion in revenue. As I suggested in early February, Apple will reach $60 billion in revenue this fiscal year. There's a possibility, if not a probability, Apple will reach $100 billion in annual revenue within two years. The Apple iPad, which has not been a factor in prior quarters, could add 20% to the June quarter's revenue with rising revenue contributions over the next several quarters. 
Apple is currently trading at a p/e multiple of 23x trailing 12-month earnings. At Apple's current rates of revenue and earnings growth, turbo-charged for the remainder of the calendar year from iPad sales, the company's forward p/e multiple drops well into the low teens. This discount to 12-month forward earnings creates a compelling argument for accumulation of Apple shares.
In the March quarter European revenue sources represented 30% of March quarter revenue. Operating segments exclusive of the Americas and Apple retail equalled almost 51% of the quarter's revenue take and represented 46% of Macintosh unit sales. In the March quarter Apple grew its global revenue category inclusive of iTunes store sales by 27% year-over-year and sequentially 12% compared to the holiday quarter. 
The emergence of the Apple iPad and its significant contributions to revenue and earnings will mask the growth in revenue and contribution to earnings of the iTunes store franchise. However, this revenue category will add favorably to gross margins in the quarters ahead. For Apple it's not an issue of hardware sales alone. It's a matter of constituent and ancillary revenue sources not only increasing revenue, but increasing the yield on hardware device sales on a recurring basis. iTunes and related revenue should continue to grow at or above the March quarter's pace for the foreseeable future. 
As I posted last week,  the story that's emerging is one of a multi-stream revenue system comprised of complementary hardware product lines. Significant revenue sources are emerging that will transcend the underlying hardware product lines and provide for both revenue and earnings growth as hardware devices adapt and change to meet the needs and desires of users. If there's one constant in the products the company will release over the next few years is the continuing monetization of hardware sales through the sales of content and services. 

Management's forward guidance (top range of the estimates) suggest revenue growth in the June quarter of just under 38% and earnings per share growth of about 19%. In other words the company represents in the June quarter earnings per share will rise at one-half the rate of revenue growth. The math used in the calculations must be atypical.  There's no way, based on recent quarterly results, that earnings per share growth will fall to 50% of the rate of growth of revenue. No matter slightly lower margins on iPad sales, Mac sales continue to perform well and the iPhone will continue to contribute both hefty margins and and strong gains for the top and bottom lines. Even with an expectation of iPad revenue contributing 20% of the June quarter's totals, gross margins should remain high with constituent and ancillary revenue streams contributing to the performance. 

To value the company's shares moving forward, one must view the revenue and earnings growth as they compound over the next two years. It's not an issue of Apple's growth. It's an issue of how quickly growth with be rationally factored into the share price. Last week I published what I consider moderate price range expectations for the shares. I expect the share price to cross $300 no later than late July and $400 per share no later than next April. 

Robert Paul Leitao

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