Saturday, April 23, 2011

Posts At Eventide: AAPL June Quarter Trends To Track

Following the release of Apple's March quarter results earlier this week there are several trends impacting near-term revenue and earnings growth that have either been confirmed by the March quarter results or more conspicuously revealed by the results. I will be tracking the following trends throughout the June quarter:
The Global Tablet Market: I've said several times outside of the Apple iPad, a global consumer market for tablet devices does not currently exist. While iPad unit shipments in the March quarter were below the expectations of most analysts due primarily to supply constraints, the tablet market is in a nascent phase of development. The Apple iPad will remain the undisputed leader in the tablet market well into CY 2012. The market can not at this time economically support a large number of potential competitors and Apple's global retail store presence is a competitive advantage competitors simply can not match.
The Apple iPhone Reigns Supreme: The Apple iPhone is Apple's preeminent revenue product. For the next several quarters the Apple iPhone will continue to dominate the global smartphone market. Revenue share is far more important than unit sales and the perceived threat to the iPhone eco-system from Android-based smartphones is nothing more than smoke and mirrors. 
The successor to the iPhone 4 (to debut later this year) will be a success on scale previously unseen even by iPhone standards. Within 90 days of release of the iPhone 4's successor, Apple will ship in the range of 30 million iPhone handsets (all models combined) provided supply can keep pace with demand. 
The Apple iPad Has A Definitive Halo Effect: The Apple iPad is a draw to Apple's retail stores. In the December quarter retail store revenue rose 95% and rose 90% in the March quarter. As much as the Apple iPad is putting pressure on global PC shipments, heavy store traffic is boosting macintosh sales. Since the release of the Apple iPad, retail store revenue growth has outpaced the pace of revenue growth of the company as a whole. 

The Apple Macintosh Will Reach 10% Domestic Market Share This Calendar Year: The global PC market has matured and is in a state of economic decline. A constituent outcome of the mass consumer migration to smartphones and other handheld digital devices is that households no longer need multiple PCs in the home further pressuring domestic PC sales. Although growth in sales of Macintosh desktops has stalled, the 53% growth in unit sales of Macintosh laptops in the March quarter confirms the popularity of Macs and the Apple iPad is buttressing Macintosh sales. Again, Apple's global retail store presence is a competitive advantage competitors simply can not match. The success of the Apple Macintosh in the era of handheld devices can not be denied nor dismissed by pundits. The Macintosh revenue paradox is its own story. 
The Apple iPod Remains Relevant: No matter the declining unit sales and revenue contribution from the Apple iPod line, the Apple iPod touch, which represents over 50% of the revenue generated from iPod sales, contributes to the success of Apple's multi-device iOS product paradigm. The Apple iPod touch is often overlooked when the success of mobile platforms are compared. 
Apple's EPS growth Will Continue To Outpace Revenue Growth: Although continuing share creep is a factor, Apple's ability to control the growth of operating expenses and continuing high gross margins will deliver rates of eps growth greater than the rates of growth in revenue. For example, in the March quarter of FY 2010 operating expenses consumed 12.2% of reported revenue. In the March quarter of FY 2011 operating expenses consumed 9.5% of reported revenue. Controlling the percentage of revenue consumed by operations is a greater factor in Apple's eps outcome variations in gross margins. 
I will be updating my historical graphs and charts over the next several weeks as I develop my revenue and earnings models for the balance of FY 2011 and FY 2012. 
Robert Paul Leitao


  1. I'm usually at work at 3PM Friday but yesterday I happened to be in an Apple store in AZ at that time. The crowd really surprised me for that time. It wasn't standing room only, but each area of the store was filled with people. Every table, desk, and stool. Nice to see.

  2. Robert, Do you think Thursday's Apple p/e of 16.72 was an outlier, or are you inclined to adjust your view of Apple's p/e range going forward downward from 18-22? 16.72 is an awfully big drop from the previous 2-year low of 18, especially after a strong earnings report.

  3. joshdean:

    While I don't expect AAPL to move higher in a straight line, I expect the shares to trade in the range of 18x - 20x 12-month trailing earnings with brief movements above and below that range.

    The market has had one trading day to adjust the valuation for the March quarter results and I expect the share price to move back above 18x 12-month trailing earnings over the next couple/few weeks.


  4. It's been 3 trading days now and Apple's p/e is now 16.70, slightly lower than after the first trading day post-earnings. I think investors may be telling Apple it will need bigger surprises from now on in order to move significantly higher. Eric Jackson discusses this in his Forbes piece today:

  5. Robert, in light of asymco's recent blog showing no correlation between p/e and AAPL share price, but strong regression between share price and cash, how do you maintain your accent on p/e values going forward?

  6. Bunratty:

    I expect to see compression in the share price relative to current rates of growth. In my view p/e multiples have no value when comparing companies in dissimilar industries and limited value in tracking established share price trading ranges for individual equities.