Apple´s Bad Quarter is a Buying Opportunity
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It finally happened, Apple (NASDAQ: AAPL) delivered not just a small miss, but numbers well below analysts’ expectations and the stock was falling by 5% as of this writing. Weakness in the numbers may easily continue for one more quarter at least, and we could witness a considerable selloff in shares of the Cupertino giant over the following months. On a long term perspective, however, this may be the buying opportunity investors have been eagerly awaiting for some time.
What Happened?
First of all let’s take a look at the numbers: iPhone sales where the biggest disappointment, with an increase of “only” 28% annually, nearly 26 million units sold during the quarter, and this was the main factor behind the soft numbers, since most analysts were expecting between 28 to 30 million units.
According to management, the main reason behind lackluster iPhone sales was that most customers decided to wait for the launch of the new iPhone 5 which has no confirmed launch date, but most analysts are expecting around October. Weakness in Europe, which is now a customary issue for most companies in the current earnings season, was another factor behind the slowing iPhone sales.
Apple last missed expectations when it reported results for the quarter that ended in September last year. That was due to the iPhone 4S's launch being pushed from that quarter to the following one, and it made up the shortfall with very strong sales in the holiday quarter. So the explanation seems quite reasonable, and related to product cycle factors and macroeconomic issues.
As for the other big product of Apple, the iPad was actually quite strong, with more than 17 million units sold, representing an 84% increase versus the same quarter in the previous year. It still wasn't enough to make up for the disappointing iPhone sales, however, and the overall numbers turned out to be below expectations.
Revenue rose 23% to $35 billion, which was below analysts’ estimates of $37 Billion, and earnings per share of $9.32 were also below expectations of $10.40. Apple, which usually downplays guidance, estimated earnings for the September quarter of $7.65 a share on revenue of $34 billion, well below the average estimate of $10.23 a share on revenue of $38.03 billion
Putting the Numbers in Perspective
Apple missed earnings expectations by a wide margin and, judging by the soft guidance, another weak quarter could be expected for the period ended in September. But Investors need to consider that a 23% increase in revenues and a 21% annual growth rate in net income are figures which most companies around the world would envy, particularly in a cyclically weak quarter.
Apple still reported well above its guidance for the quarter of $34B in revenues and $8.68 EPS, and the company is famous for providing extremely conservative guidance numbers. If we add this conservative guidance for the fourth quarter into earnings estimates for this fiscal year, Apple will report a 65% increase in earnings per share for the fiscal year ended in September 2012.
That doesn't sound so bad after all, and if we also consider the blockbuster potential of iPhone 5 which will likely be introduced at some point in the quarter ended in December - the first quarter of fiscal year 2013 for Apple – growth potential in the middle term looks actually quite exciting.
Sure, growth is slowing for Apple, but that's hardly a surprise considering its eye-popping success over the last years. It would be almost impossible to replicate those growth rates in the future and, perhaps more important for Apple investors, the stock is already priced for slowing growth. In fact, Apple looks quite cheap in comparison to other tech bellwethers.
The table compares valuation and financial ratios for Apple versus other technology leaders like Amazon (NASDAQ: AMZN), Ebay (NASDAQ: EBAY), Google (NASDAQ: GOOG) or Facebook (NASDAQ: FB). The conclusions from the analysis are quite clear: Apple looks really attractive from a valuation point of view, even when considering the different growth rates expected for these companies.
Analysts are expecting an average growth rate of 21% for Apple in the next five years, that's quite close to the numbers the company reported this last disappointing quarter, so it looks like an achievable forecast. If we take a look at the PEG ratio – P/E divided by growth expectations – Apple is the cheapest company in the table for a wide margin, with a PEG of 0.7.
Apple also has the lowest Forward P/E ratio and Price to Free Cash Flow ratio of the group, and in terms of profitability Apple has the highest ROA - Return on Assets - and ROE – Return on Equity – in the table.
Bottom Line
Apple disappointed analysts and growth is slowing from past levels. But if we look at the company's fundamentals with a long term perspective, those factors are already factored in into the company's valuation. A great company going through some transitory weakness and trading at a very attractive valuation, this is a buying opportunity in my book.
acardenal has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Amazon.com, Facebook, and Google. Motley Fool newsletter services recommend Amazon.com, Apple, eBay, Facebook, and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
