Duh! People Are Waiting!
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Sometimes the reason behind a company's quarter-to-quarter difference in earnings is so simple that it nearly jumps off the page. It appears obvious to everyone, but no one wants to admit it. This was the case with Apple's (NASDAQ: AAPL) recent earnings report. While much has been made of the fact that the company missed on both revenue and earnings per share, the answer lies in one product. Given the timing of the earnings report, and expectations for the next iPhone sometime in the next three months, the reason for this miss is that people are waiting. In the short term this appears like a problem, but long-term investors should simply ignore the recent selloff in the stock.
The fact that Apple could sell 26 million iPhones in just three months and have this be called “disappointing” is unbelievable. This level of sales represents 28% unit growth on a year-over-year basis. Considering that nearly everyone expects the iPhone 5, or whatever it will be called, to be released in the September to October time frame, there is an obvious drop in sales related to customers waiting for this release. In addition, investors need to keep perspective and realize that the current earnings miss was only by 10%. In the last two quarters, the company has beaten expectations by better than 20%. It's almost certain that next quarter's lowered guidance is directly related to the same factor of customers waiting. That being said, if the iPhone 5 is released in the September to October timeframe, earnings for December 2012 should be outstanding. Speaking of outstanding, that is the only way to refer to the number of iPads sold in the current quarter.
With 84% unit growth, the company sold 17 million iPads and I'm sure this was driven by the release of the “new iPad." This is an example of the type of sales jump that happens when Apple releases its most recent version of a popular product. Since the “new iPad” was released, customers know that it will likely be next year before the next version of the same size iPad will come out. While there's a rumor about an impending iPad mini, this doesn't appear to have affected sales. I've written in the past that the iPad mini is likely to replace the iPod touch. Given that the company saw a 10% unit decline in total iPods sold, this would simplify the company's reporting structure if it occurs. Among the positive news of the number of iPads sold, and the disappointment in the number of iPhones sold, everyone seems to have missed the company's unbelievable financials.
For a primarily hardware-based company to report a gross margin of 42.8% is impressive enough. However, probably the most impressive number was the company's operating cash flow growth. Apple produced just short of $42 billion in operating cash flow, representing an increase of almost 54% over last year. With free cash flow of $36.886 billion, and a quarterly dividend cost of just $2.48 billion you can see the company has plenty of extra cash coming in. With Apple's total cash and investments now at over $117 billion, the argument for the company to make a significant acquisition is, I'm sure, going to get louder. While the company did not hint at any pending acquisitions, Tim Cook certainly seemed excited about what the company has in store for customers in the future.
In the CEO's own words, “we are also really looking forward to the amazing new products we've got in the pipeline.” One of the first introductions is something that is already out, and that is OS X Mountain Lion. This updated operating system for the Mac allows users to have the benefit of several different features from iOS. As previously mentioned, another expected product introduction is the iPad mini. In theory, this smaller iPad would compete more directly with the Google (NASDAQ: GOOG) Nexus 7, and the Amazon Kindle Fire. While the specs and price points are still being debated, it seems like this would be a good entry point product to introduce many customers to the Apple experience. The most talked about product, which is expected this year as well, is iTV. While it's unclear exactly what Apple could use to differentiate a television produced by the company, one speculation is that Siri could be used as a voice remote control. If the company brings items such as game center along for the ride, Apple could not only compete in the traditional television space, but also against console gaming machines. With the possibility of these product introductions, it seems just a matter of time before Apple is back to beating earnings expectations again. Investors looking for the best technology stock to buy would be hard-pressed to choose a company other than Apple.
Looking at some of the company's competition, the two names that are mentioned in connection with Apple the most are Google and Microsoft (NASDAQ: MSFT). With the acquisition of Motorola Mobility, Google now has the capability to compete head-to-head with Apple in integrated hardware and software. The company's Google Play site is the company's web based version of iTunes. If mobile computing is the future then Google has taken a big lead, considering that Android is the number one mobile operating system. The part of Google's offering that seems lacking is that the company does not have a competitive operating system that does not require internet connectivity. While Chrome OS is decent, I believe Google needs to produce a standalone operating system if the company expects to compete across all hardware categories. This is opposite from the situation that Microsoft finds itself in. With Windows running the majority of PCs, the company dominates traditional computing. The challenge now is for Windows 8 to compete in a mobile world that is owned by Android and iOS.
While Apple certainly faces competitive pressures, the numbers certainly favor the company. At today's price, Apple sells for just over 12 times expected 2012 earnings. With a new dividend giving investors a yield of about 1.9%, the stock is no longer just a growth story. Where Apple clearly has the lead, is expected growth in earnings per share. While Google is expected to grow at about 16%, and Microsoft's growth is expected at roughly 9%, Apple crushes both numbers with a better than 22% expected rate of growth. Google pays no dividend, and Microsoft's yield of 2.7% still does not make up for the company's much slower expected earnings growth. If Apple continues to innovate and deliver improvements to successive generations of devices, today's price will be considered a good entry point. If the company didn't have any major products upcoming I would be worried, but we've seen this story play out before with the iPhone 4S, and I believe the same dynamic is at work with the new iPhone as well.
MHenage owns shares of Apple. The Motley Fool owns shares of Apple, Google, and Microsoft. Motley Fool newsletter services recommend Apple, Google, and Microsoft. 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.