Sunday, August 30, 2015

Apple And The Long Arc Of Time

“In the fiscal year beginning in late September, Apple will generate over one-quarter trillion dollars in revenue and sell more than one-quarter billion iPhone handsets. In the upcoming December quarter the company will set yet another record for corporate profitability in a three-month period.”

I posted the above paragraph as a comment on a recent column by Philip Elmer-DeWitt about Apple’s upcoming September 9th event. The focus of Philip’s column, in my interpretation, is the incessant demands of Wall Street for sensational new products, “one more thing” surprises and almost Hollywood-style showmanship at every Apple special event. I concluded my comment by posting, “While some on Wall Street might want the likes of PT Barnum, most of us who buy Apple products and invest in the company’s stock prefer the steady hand of CEO Tim Cook.”

While millions of us may enjoy discussing, debating and speculating about what new products Apple might have under development or may announce during the company’s fairly regular product events, the company’s revenue over the past several years has been marked by an impressive and unbroken sequence of rising year-over-year quarterly growth. This has occurred without game show-style product introductions or fantastical claims about future product features and functionality. 

Apple And The Long Arc Of Time 
The graph below illustrates Apple’s revenue on a quarterly basis as far back as FQ1 2009. In that quarter recognized revenue was $11.880 billon. By comparison, in FQ1 2015 Apple’s recognized revenue was $74.599 billion or a greater than six-fold increase in revenue in the first quarter of the fiscal year over a six-year period of time. No wonder Apple’s CEO is fond of the term “long arc of time” when responding to analyst questions during the quarterly conference call with analysts. When Apple completes the current fiscal year near the end of September, the company will report a greater than five-fold increase in revenue over the same six-year period. 
The corresponding EPS graph below illustrates an even more impressive outcome during this six-year period. Again using FQ1 2009 as the benchmark, Apple’s earnings per share in FQ1 2015 of $3.06 was 8.5 times greater than the split-adjusted $.36 in eps reported in FQ1 2009. While the company’s ongoing share repurchase program has diminished the fully diluted share used on a split-adjusted basis in this comparison, the company’s rising revenue has been the most substantial factor in the eps growth rate.

Tuesday, August 25, 2015

What A Weird, Whacky and Wild Stock Market Ride!

I’ve been receiving inquiries about when I will publish my next article. My answer is: “Soon.” I primarily cover Apple’s fundamentals with an emphasis on performance trends. I’m sure what I describe as a “Weird, Whacky and Wild Stock Market Ride!” has created some curiosity as to how I view Apple and the market in the midst of this rollercoaster ride on Wall Street.

Because I follow Apple’s fundamentals and not technical charts or the broad market in general, I’m a bit bemused by the recent pummeling of Apple’s share price. In my view, the company’s fundamentals remain strong in the midst of a $140 billion share repurchase program, a dividend increase put in place last spring and recent comments from the company’s CEO the iPhone’s performance in Greater China in on track with management’s expectations for the current quarter. As of the end of the June quarter, Apple had about $150 billion in cash, cash equivalents and marketable securities net of debt acquired to fund share repurchases.

In other words, management has ample resources to fund the share repurchase program, increase the quarterly dividend again next April while investing in research and development on existing products and yet-to-be-announced products and services.

I consider Apple a buy-and-hold long-term investment. Although I continue to acquire shares, I do not “trade” the stock or any other stock. I’m not one to provide stock market advice. I don’t have a margin account, I have never purchased options and have no desire to “trade” stocks. I am a long-term Apple shareholder focused on the company’s fundamentals. I tend to hold equities for more than a few minutes or a few months.

My current view is as follows: 

Around this time last year the Street’s consensus revenue estimate for the current fiscal year ending in September was $197 billion. The company is closing in on about $235 billion in revenue for the period.

At this time the Street’s consensus revenue estimate for FY2016 is, according to Yahoo! Finance, $244.66 billion or an estimated revenue growth rate of about 4.90%. According to the same source, the Street’s current eps consensus estimate for FY2016 is $9.76 or about a 7.2% eps growth rate over the current eps estimate for FY2015 of $9.13. 

In the first time nine months of the current fiscal year Apple’s revenue rose about 30%. iPhone unit sales, representing roughly two-thirds of the company’s reported revenue total, rose about 41% in this nine-month period. Apple Watch revenue will be wholly accretive to revenue growth on a year-over-year basis in the first six months of the fiscal year beginning in late September.

More than a device maker, I consider Apple a “customer relationship continuum.” I consider each new product release and the company’s new services such as Apple Pay, Apple Music and the highly anticipated TV content service as continuations of the ongoing “conversation” Apple has with its global customer base. While past performance is not necessarily an accurate indicator of the company’s future performance metrics, I do expect Apple’s revenue and earnings per share growth performance in FY2016 to handily beat the Street’s current expectations. 

I see a great deal of strength in Apple’s product and services lines and in the ongoing relationship the company has with its hundreds of millions of product and services customers. While I don’t expect the same revenue and eps growth rates next fiscal year the company is enjoying this fiscal year, I do see real opportunities for continued growth in each of Apple’s regional revenue segments.

I’ll be back with my next article soon. In the meantime I remain bemused by the dramatic drop in the share price over the past few weeks, the broad market’s significant pullback not withstanding. 

I’m not one to give investment advice and please don’t consider any content I post to be investment advice. All investors need to perform their own due diligence and make informed decisions based on their circumstances and objectives. But in my own ongoing conversation with the readers of my blog, I’m confident in the ability of Tim Cook & Co. to continue to successfully execute the company’s business plan, I look forward to trading in my iPhone 5s for the next flagship iPhone handset this fall and acquiring the new Apple TV (when it finally arrives!). Until then I’ll watch with more than mild curiosity the wild gyrations in the share price. My next article is: “Coming Soon.” 

Robert Paul Leitao

Disclosure: The author is long Apple shares

Saturday, June 13, 2015

Wall Street Discounts Apple’s Revenue and Earnings Trend

On Friday, June 12th, Apple’s share price closed at $127.17. This represents a valuation of 15.72 times trailing 12-month earnings of $8.09 and about 14.10 times the current Wall Street consensus earnings per share estimate of $9.02 for the fiscal year ending in late September.

As I will illustrate in this article, I consider today’s valuation of Apple to be low and I expect the share price to move significantly higher over the next six months. 

Apple’s Revenue And Earnings Trend
Following a five-quarter period of single-digit revenue growth that ended in the June quarter one year ago, Apple’s revenue has risen on a year-over-year basis by nearly 25% over the most recent three fiscal quarters. The graph below illustrates the rebound in Apple’s revenue growth rates and the beginning of the company’s current fast-growth epoch that will continue through next fiscal year.
Apple’s earnings per share have risen nearly 39% over the same nine-month period. The graph below illustrates the return to earnings per share growth that began in FQ1 2014 and the acceleration of the earnings per share growth rate over the most recent six fiscal quarters.
Apple’s Net Income And Gross Margin By Quarter
Since the nadir of 36.87% gross margin in FQ3 2013, Apple’s gross margin has rebounded to 40.78% in the recent March quarter. Rising iPhone unit sales have delivered the company’s highest gross margins in three years and the company is now riding down the cost curve on the larger-screen iPhone handsets. The iPhone 6 series handsets will deliver high gross margin through the two-year handset cycle. The graph below illustrates the company’s gross margin recovery over the most recent seven fiscal quarters.

The graph below illustrates the rising percentage of revenue flowing to the company’s net income line since the release of the iPhone 6 handsets. Fast rates of revenue growth combined with higher gross margin have dramatically increased the percentage of revenue flowing to the net income line. The sharp rise year-over-year in the percentage of revenue flowing to the net income line will continue through the end of FY2015.

Saturday, March 28, 2015

Painting With Numbers: Apple’s Regional Revenue Mix

Since the release of Apple’s larger-screen iPhone handsets last fall, the company has entered a new era of growth. My forecasting models suggest the company will deliver impressive rates of revenue growth through this fiscal year and through at least FY2016 which commences in late September. While the iPhone currently delivers about 70% of the company’s reported revenue, the resurgent iPhone product line along with the rising popularity of Apple’s Macintosh line of personal computers will boost the rates of growth of constituent accessories and services such as the forthcoming Apple Watch and a new TV service expected this fall.

The fast rates of revenue growth expected through at least FY2016 are due not only to the success of the iPhone, but also Apple’s ongoing geographic expansion. Apple will soon reach one billion product and services customers across the globe with the Macintosh line, the iPad line and the company’s robust eco-system of apps, content and services playing important supporting roles in the company’s fast rates of growth.

Concurrent with the release of December quarter (FQ1 2015) results in January, Apple’s management changed reporting of revenue on a regional basis. Apple eliminated the reporting of revenue of its global franchise of retail stores as a separate regional revenue segment and incorporated the revenue from the stores in the geographic regions in which the stores are located. The company also provided retrospective reports for fiscal years 2012 through 2014.

Apple’s FY2014 Regional Revenue Mix
The graph below illustrates Apple’s revised regional revenue mix for the fiscal year that ended last September. 
For the fiscal year, the Americas and Europe regions combined represented 68% of reported revenue. Greater China, Japan and the Rest of Asia Pacific comprised the remaining 32% of the company’s reported revenue total. Apple’s highest concentrations of retail stores are in the US, Canada and Europe. The reporting of retail store revenue in the regions in which the stores are located provides a clearer picture of revenue activity on a geographic basis. 

FY2014 Revenue Growth By Region
The graph below illustrates the rate of growth by region in a fiscal year in which aggregate revenue rose at a modest 6.95% rate. Greater China was the fastest growing revenue region while Japan also delivered double-digit revenue growth. The Rest of Asia Pacific region realized a revenue decline in the 12-month period.

Saturday, February 28, 2015

Apple’s Success Is Based On Fundamentals

On February 27th Apple’s share price ended the month’s trading at $128.46 after achieving an all-time high of $133.60 in intra-day trading on Tuesday, February 24th. The closing price represented an 8.82% rise in the share price from the opening bell on Monday, February 2nd and a 17.70% rise in the share price since the release of December quarter results on January 27th. 

Speculation About An Apple Car
In addition to Apple’s strong December quarter performance sparked by record iPhone unit sales and iPhone revenue, speculation about the development of an Apple car has added a new and alluring element to the company’s share price action. No matter the fact if an Apple car is under serious development it would not reach the consumer market before 2020, investors are attracted to the concept of Apple entering the auto industry as a new sector for revenue and profit growth.

Apple’s March 9th Special Event
Choosing the first weekday following the seasonal change in time to announce the release date and pricing for the Apple Watch, Apple has sent out invitations for a March 9th special event. The Apple Watch is the first new product line to be released by the company since the appointment of Tim Cook as CEO. While expectations for unit sales vary widely among analysts, the Apple Watch will deliver new revenue and net income for the company. The Apple Watch will add appreciably to Apple’s revenue and earnings per share growth rates particularly in the first four fiscal quarters following release. 

FY2015 Revenue and Earnings Per Share Expectations
The Wall Street consensus revenue estimate for the fiscal year ending in September currently stands at $225.24 billion, representing anticipated year-over-year revenue growth of 22.22%. The Street’s current consensus earnings per share estimate of $8.59 represents anticipated eps growth of 33.18%.

In contrast, my current revenue target for FY2015 is $235 billion and earnings per share for the fiscal year of over $9.25. My comparatively bullish outlook, anticipating revenue growth of 28.56% and earnings per share growth in the range of 44%, is based only in part on expectations for the early success of the Apple Watch. Rising iPhone and Mac sales are integral to my revenue growth models. Apple’s net income per revenue dollar is rising quickly as the rate of revenue growth zooms beyond 20%.

Apple’s Success Is Based On Fundamentals, Not Faddishness
While an Apple car is an interesting topic for conversation and as we mark time waiting for news on the release date for the Apple Watch, management is hard at work boosting the company’s underlying financial performance.

The graph below illustrates Apple’s net income performance over the most recent twenty one fiscal quarters. The recent December quarter’s iPhone unit sales growth rate of 45.94% sparked a 37.88% rise in net income and boosted net income per revenue dollar to 24.16%.

The graph below illustrates in a more simple way Apple’s net income per revenue dollar over the same 21-quarter period. The larger-screen iPhone 6 handsets have not only boosted unit sales, the increase in the average selling price (ASP) has boosted the company’s gross margin.

Saturday, January 31, 2015

The Earnings Trend Is Again Apple’s Friend

On Tuesday, January 27th, Apple announced December quarter results with record revenue of $74.599 billion, record net income of $18.024 billion and record earnings per share of $3.06. Beyond those superlatives, Apple also set a global record for quarterly net income of any publicly-traded enterprise in history. The depth, spread and scope of Apple’s December quarter success caught even the most bullish Wall Street analysts by surprise. 

The good news for Apple shareholders is the company’s December quarter results are not a crescendo but merely the first fiscal episode in a new epoch of outsized enterprise success.

The Earnings Trend Is Again Apple’s Friend
The graphs below illustrate the dramatic change in the company’s revenue and earnings trends delivered in the December quarter. 
Against a backdrop of foreign exchange headwinds, Apple’s recognized revenue on a sequential basis rocketed higher by 77.1% in the period. On a year-over-year basis, revenue rose 29.53% The December quarter delivered the highest rate of year-over-year revenue growth since the March quarter of FY2012, nearly three years ago. On  a sequential basis, the rate of revenue growth was the fastest rate of growth in the study period of just over six fiscal years or twenty five fiscal quarters. 
On a year-over-year basis, Apple’s 47.83% rise in earnings per share was the fastest rate of growth since the March quarter of FY2012 and on a sequential basis, the fastest rate of growth in the twenty five fiscal quarters under study. Aided by the ongoing $90 billion share repurchase program, Apple’s record net income of $18.024 billion translated into earnings per share of $3.06 in the December quarter. In the period net income rose 37.88%.