Saturday, May 19, 2012

The Apple June Quarter Halftime Report

On Friday, May 18th, AAPL ended the week's trading at $530.38 per share, down 17.5% from the all-time high of $644 per share set on April 10th in intra-day trading. Although at Friday's closing price the shares are up 31% on the calendar year, the current price-earnings multiple of less than 13 times trailing 12-month earnings of $41.04 is at the low end of the trading range established over the most recent six calendar quarters.
The current low valuation is remarkable considering Apple's 63% revenue growth over the most recent four fiscal quarters and corresponding eps growth of 95.5%. Additionally, there is over $116 in cash and marketable securities standing behind each outstanding share.
For long-term investors, Friday's closing price represents an unreal acquisition opportunity ahead of the pending Mac line refresh, the release of the successor to the iPhone 4S and the eventual addition of China Mobile as an authorized iPhone carrier. Each of these events will have a stimulative effect on the share price as Apple journeys through the next twelve months.

The Apple June Quarter Halftime Report
This past week we passed the halfway point in Apple's June quarter that ends on Saturday, June 30th. Today, I'd like to share my early expectations for each of Apple's major product lines in the quarter.
The Apple iPhone
In the March quarter Apple reported an impressive 88% iPhone units growth rate for the period. But the 35.064 million iPhones reported sold included an increase of about 2.6 million units in channel supply to 8.6 million. Management reported residual demand for the iPhone 4S in the Asia-Pacific region during the March quarter conference call with analysts, but the channel supply number will need to be reduced as Apple prepares for the launch of the successor handset.
The iPhone 4S is the most popular iPhone handset Apple has ever produced. But the product may have peaked during its introductory quarter and I have doubts the product can hold the world stage for a full 12 months as Apple's flagship handset. I expect a dramatic decline from the March quarter's iPhone unit sales growth rate of 88% in the June quarter as the drawdown of channel supply will impact reported unit sales and as public attention begins to turn to expectations for the next iPhone handset. 

In the first two quarters of FY2012, Apple sold more than 72 million iPhones. Apple successfully met global demand over this period while realizing an almost 107% increase in unit sales. Apple's next challenges are acquiring component supplies and ramping manufacturing capacity for the successor to the iPhone 4S. The new model will most likely sport a new form with other major hardware advancements making the manufacturing transition more challenging than the transition to the iPhone 4S.

Although the pace of global smartphone adoption has reportedly slowed, the addition of new carriers and Apple's increasing product presence in developing markets will support continuing strong growth for the iPhone line through the release of the successor flagship handset. The next flagship handset will sell on a scale not seen before even by iPhone standards. But the next quarter for "blow out" iPhone sales numbers may be the holiday quarter or first fiscal quarter of FY2013.