Apple Q1 earnings: How big the bounce?
Apple (AAPL) by all accounts had a terrific holiday season. The Apple Stores were packed, and Macs, iPods and iPhones were shipping in record numbers. On Christmas day alone, Steve Jobs announced at Macworld last week, the company sold 20 million songs.
Then the market tanked, and Apple’s shares, having more than doubled in 2007, went into free fall. As the Dow dropped 10 percent, Apple dropped more than 20 percent, from a record high of 202.96 to just over 161.36 last Friday.
This will presumably change on Tuesday, when the company reports its quarterly earnings. If nothing else, day traders are likely to load up on the stock and it options, anticipating that Apple will easily beat its projected $1.42 earnings per share on sales of $9.2 billion — guidance that was considered uncharacteristically unconservative when it was offered three months ago. The street consensus is now $1.62 EPS on $9.47 billion. Piper Jaffray’s Gene Munster, always the optimist, is looking for $1.73 on $9.73 billion, and as of Jan. 14 was still calling for a price target of 250.
Even Munster doesn’t expect that kind of bounce when earnings are announced after Tuesday’s market close. What he and the other analysts will be tuning in for is the conference call that starts at 5 p.m. ET. (You can listen to the webcast here.) How Apple’s shares behave in the weeks ahead will depend on a handful of key numbers to be revealed in that call. Here are the ones the traders who hang out at The Mac Observer’s Apple Finance Board will be listening for:
- Earnings per share. Beating guidance and meeting the street consensus is a given. The traders here are whispering about $1.80 per share, and even that wouldn’t equal the 73 percent year-to-year earnings growth Apple has achieved over the past four quarters. To do that, it would need $1.94 EPS.
- Forward guidance. Apple tends to be cautious when projecting future earnings, preferring to under-promise and over-deliver. But traders are abnormally sensitive these days to recession signals, and if the company’s forward guidance is too conservative, it could be read as a sign that even Apple is starting to feel the pinch.
- Gross margins. As the AFB moderator who calls himself DawnTreader puts it: “Volume is nice. But high-margin volume is better.” He’s watching how much of each sales dollar flowed to cover operating costs and to the bottom line after manufacturing costs.
- Mac sales. This is the key to the quarter, according to Piper Jaffray’s Munster. “If Apple sells 2.3 million units, it would be a significant positive,” he wrote in a report to clients issued last week. “2.3 million Macs represents 43% y/y growth compared to 28% y/y in Dec-06 and 20% in Dec-05.”
- Deferred revenue. I don’t pretend to fully understand the significance of the tricky way Apple accounts for its iPhone and Apple TV revenue. But this is what DawnTreader says about it: “One of the most important numbers IMHO is the net pick-up in cash exclusive of deferred revenue liabilities. Net income and EPS is impacted by a number of non-cash expenses including depreciation and amortization. How much net cash exclusive of deferred revenue and other liabilities flowed to the balance sheet?” (link)
Got that? Good luck.
No one is going to care how much they beat by in Q1. Everyone is going to want to hear what Apple thinks they can do in Q2, which given the current market conditions will probably be lower then the expectations set by inverters. An options trade would be the smartest move.
BINGO - I win! For spotting all the unnecessary buzzwords people used in their comments to validate their presumed intelligence!
we’ll find out on Tuesday. isn’t the suspense exciting?
I believe that Steve Jobs doesn’t care what analist and people in Wall Street think about him or Apple, he does things his way and that’s part of the huge success of Apple. He’s rich, clever, famous, and in the height of a successful reign as CEO of one of the most successful companies in the world.
Apple has it all, and still years to come ahead.
If we see and analize how Apple is doing, there’s no way that Apple is doing wrong, it’s just thanks to weak scared analists that act like sheeps with no path, that the stock is so volatile.
The retail stores are expanding and very popular. They have the greatest and most reliable computers in the market. The most wanted Chrsitmas gift by far was the iPod, ask Santa Claus. The iPhone is so ahead of time that nothing comes close to it. Then comes iTunes, movies, music, just the perfect business model, and I could go on forever…
People are usually very happy to make 20% of anual profit in their investments, Apple gave us more than 100% profits just last year! If analists think they know so well how to invest money and expect more than 100% profits again this year maybe it won’t happen again, so what? I will still be very happy with a 20%, all the rest is bonus and I can bet anyone that 20% is a joke on this stock!
Apple is a very solid company that for sure will exceed all Wall Street expectations (again) and the growth of market share in Apple computers and products can only grow more.
dewitt.
You didnt do enough research for this article. At the end of the fourth quarter report the wall street consensus was for 8.7 billion for the first quarter. Apple said forget that number and forecast it as 9.2 billion. That is an extra 500 million dollars. So if apple beats that with 9.4 to 9.5 it would have easily beaten wall street estimates 3 months ago.
ex ped: You’re right, Apple surprised analysts with its guidance last quarter. That’s why the piece referred to it as “uncharacteristically unconservative.”
Hey Dan-
Thoughtful response.
Amazon IS a major channel. Of course you are right when you say that the Apple retail stores and the online store are larger, but we can never get any information from them at all.
As far as I know, Amazon does not release any figures. However - the rankings (go to any sector page and sort by “best selling” 
are frequently cited not only in blogs, but by analysts as a valid indication of how a product is doing.
Of course you are correct in both your points: (1) if there is a recession then Apple - along with everyone else, will be hurt, and (2) no company can grow exponentially forever.
To (1) I answer - If a company is in a high growth mode, then it will weather the recession better than others. Growth will, of course, be affected, but at least (I expect) there will still be some growth rather than shrinkage as in other tech firms.
To (2) - At some point growth will have to slow. But this day (recession aside!) is several years off. Mac has a brand new, very hot product in a totally new sector (iPhone). Also, since the Mac’s world wide market share is only something like 5 or 6 %, there is room for it to grow for a long time. If it were to double market share every year (an impossible feat, really) until it reached 50% (a quite possible number), then that would still be (5%, 10, 20, 40, 50 - very roughly) 3 years of exponential growth. if it grew share at only 1.25x (very high but possible) then the growth would be sustainable for even longer.
—–
So ask - is it really possible that Mac could attain 50% share? I answer, if it is true that the Mac is a superior OS (as a longtime software engineer, I do believe that), and it is more reliable and ultimately much cheaper to run, then yes it is possible.
Ask yourself - in all these blogs there are detractors as well as supporters. How many times have you seen an IT person say “I have (my company has) switched to a Mac(s), and I will never go back to Windows!” I have many times. NOW -have you EVER seen an IT person say “I just switched from Mac environment to Windows and I love it.”????? ever?
—–
Finally - I stand by my statement earlier - we are used to buying things online sight unseen, but usually this is a familiar product. to me it is astounding that the Air is this popular (right now #6 of all laptops on Amazon) and NO ONE HAS EVER SEEN ONE!
Shows a lot of faith in Apple.
the fact that the MacBook Air is
The value of the stock market has nothing to do with us being in a recession. A recession is negative economic growth of more than two successive quarters. Right now we are experiencing a recession of sentiment and a news media that is talking us into one. My opinion, once the market has realized that it has it wrong, then stocks will rebound. That is if the Fed and Congress doesn’t screw everything up in the interum by juicing the economy too much. Common sense economics says you don’t use fiscal stimulus or increase the money supply unless you actually are experiencing negative growth. Apple is a steal right now.
What will happen to Apple stock with earning release? It will spike in a huge way. Apple had their best quarter EVER last quarter. I firmly believe that beginning Tuesday Jan 22 at 5:00 PM EST, Apple will turn around the tech market and lead the way. It will become a must buy as a unique stock with huge upside but rock-solid fundamentals.
To jmmx: Does anyone have any idea about the volumes of amazon PC sales? It’s all well and good to quote Apple PC sales ranks at Amazon but without the context of volume it’s meaningless. Is Amazon even a big channel for Apple? Apple probably sells far more laptops through the Apple stores and direct through its own website. The next couple of quarters after the one to be reported this week will be very telling for AAPL - can the company keep sales and margins up with a slowing economy and the tapped-out consumer? I doubt it. Every stock mean reverts. There’s no way for the growth & profit trajectory to continue given the macro conditions.
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Just looking at Amazon notebook best sellers list (Sunday - 2:40 PST)
All laptops:
Apple has 4 of the top 10, including #1-3. #5 is the new Air ($1794 model)
The very first laptop over $2000 is #14- a MacBook Pro ($2500) At #61 The MacBook Air with 64GB SSD ($3093)
—-
Laptops $2000 and up:
Mac takes the first 4 spots, the Air with 1.8 GHz and 80 GB drive is #2 ($2094) and
At #4 is the ($3093) Air with the SSD.
The next over $3000 computer is the Sony VAIO VGN-TZ195N/XC 11.1″ Laptop (Intel Core 2 Duo Processor U7600, 2 GB RAM, 48 GB Flash Drive,
This is only 1.2 GHz (where are those folks screaming about proc speed) - has a smaller screen - and a smaller SSD (flash drive). It DOES have a lot more ports, and a DVD drive. BUT at 8 pounds it weighs almost 3 times the Air and costs $300 more ($3383)
—–
POINT IS:
No one has even SEEN one of these things (MacBook Air) and it is already a best seller!!!!
With Friends Like AAPL shares…who needs enemies right? If you look at history, when the market KNOWS! that it is in recession, contrary to those who think it discounts ahead of time….the market usually falls greater than 10%…that is one the day we KNOW we have a recession!!! We have finally gotten that in January! We are in a recession…despite the fact that most people do not even know that if this market falls to 11,500 it will have not done anything for eight years!!!!! Zero For 8 Years….and you think we are just now in a recession? My view is that we have had the same general spending pattern for some time….those that have spend those that do not shop at walmart and buy food! AAPL relies on employed people making much more that median income. AAPL will be fine….but the stock will fall along with the market…….perhaps a bit more…….before the market turns and AAPL begins doing well again.
Keep perspective….Where was the stock in July? And you want to complain about 160? Please! The market has no perspective….never has….never will……it has no idea how bad things could be or how great things might be…….it trades on emotion and hope and fear….good luck…I vote AAPL down…….why? Just because everything else will be
Hello, I carefully read your post. Unless I misunderstood you sustain that the title Tuesday after the dissemination of results should not suffer. My English is not perfect and I read from you.
Unfortunately, I entered some ‘high to $ 182.00. I believe in this title and I think very positive. Share you?
The volatility is a constant but every fall there’s always been a substantial rise. I hope of course a rinbalzo proportionate to its potential.
I profit by Q1 is eerily close to $ 2. Dollars.
Stefano
Guidance will not be the key, since it is always conservative when it comes from Apple. This quarter’s earnings will demonstrate that (despite popular belief) the quidance was conservative this time as well.
What will happen this time is exactly what happens every single quarter: once Apple announces its earnings and guidance, the bashing outlets of all kinds, ranging from outsourced forum bots and all the way up to paid clowns on CNBC, will immediately start bashing the stock on the basis of “weak guidance” frantically trying to drown any voices of reason in their mindless yelling. This will trigger the standard drop in the stock price due to considerable percentage of inexperienced traders that we’ll have in AAPL by Tuesday. Once the drop bottoms out, the stock will skyrocket. This is how it always happened with AAPL, every single quarter.
So, once again, guidance will be extensively used by financial con-artists to create a better entry point, but it will not seriously affect the stock price in the days to follow.
Steve wrote: 1. How in the world is “from a record high of 202.96 to 161.36″ a “drop of more than 20%”?
Perhaps I don’t understand your question but here’s the math
((202.96 - 161.36)/202.96) X 100 = percent reduction and that percentage reduction is 20.496 %, i.e. just like Mr. DeWitt said “a drop of more than 20%.”
If that is not what you are talking about, please clarify.
two things:
1. How in the world is “from a record high of 202.96 to 161.36″ a “drop of more than 20%”?
I know DeWitt loves to shape his stories about AAPL, but fudging/exaggerating fourth grade math seems even below his FOX-like “standards”.
2. Half of the column is dedicated to quoting from postings on finance discussion boards?!
“Mac News from outside…. blah blah blah” is the title of the column. DeWitt actually believes cutting and pasting from finance boards is “news” reporting? LMAO.
I’d like to end my comment (that DeWitt will never have the courage to post) with a question: How much is this clown paid to “write”(read: cut and paste) this nonsense?
PS, Nice picture of Walt. Too bad he has NOTHING to do with your “story”.
Did you mean Q4 earnings? We’re only 3 weeks into Q1.
ex ped: Apple’s Q1 is the calendar’s Q4. –Philip Elmer-DeWitt
Did you mean “smart enough to give honest forward guidance”? I’m hoping that it’s good, but I’m expecting that it’s honest.
As you point out in the column, there are several key components to Apple’s financial reports that must be evaluated and analyzed. Not all revenue is created equal and Apple’s ability to maintain high margins while building sales volume is among the more important factors in the company’s continuing success.
Apple doesn’t sell products. The company builds customer relationships that sell products. Revenue and margins per customer is the name of the game. The “beyond the box” sales of products and services such as .Mac and AppleCare are what contribute to Apple having the highest gross margins in the PC industry.
The monthly revenue from AT&T on iPhone service contracts should also have a material impact on Apple’s earning per share beginning in the December-ending quarter.
Robert Leitao (a/k/a DawnTreader)
ex ped: Welcome, Robert!
Walt tuesdsay earning should be interesting, I do believe guidance is the key and hopefully Steve jobs is smart enough to give good forward guidance.
Thomas A. gaughan
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Silicon Valley veterans like to joke that Steve Jobs must be surrounded by a reality distortion field; if you get too close to him, you start to believe what he's saying. Thanks to the success of the iPod, the launch of the iPhone and the renewed interest in the Mac, Apple has made believers out of millions of customers - and made a lot of investors rich. But Philip Elmer-DeWitt believes that an ounce of skepticism never hurts when writing about the company. He should know. He's been covering Apple - and watching Steve Jobs operate - since 1982, first for Time Magazine, then for Business 2.0, and now for Fortune.
“The value of the stock market has nothing to do with us being in a recession. A recession is negative economic growth of more than two successive quarters.”
True, but we may be headed toward something more akin to either a depression or hyper inflation. The monetary policy of the Bush Administration has been to print money, print money, print money to try and drag the ‘lending’ economy along for the past 8 years. The fact is the longer you try and put this downturn off, the worse it will be. The old ‘wheel barrow’ of money for a loaf of bread will be replaced with a car full of money to buy a large screen TV.
While house prices have been going up at 25 and 30% this wasn’t just an increase in some before unimagined value, it was inflation. The price of an average house went far beyond the average income - and banks just let people borrow more (and lowered their standards) to reach it. And people borrowed against this imaginary value (my house is worth 6 times what it was two years ago!) they made it even worse, not to mention what Wall Street did by selling these mortgage packages, and reselling, and reselling.
This very well could be worse then a recession.
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