Monday, October 18, 2010

Profit Taking on Apple

After the close, Apple (AAPL) reported earnings that blew away analyst estimates by some $2B with earnings at $4.64 vs $4.06. The stock sold off some 6% though due to various 'concerns' such as weaker margins and iPad sales.

Typical Wall Street action. Take astonishing bullish numbers and focus like a laser beam on a few minor concerns. Instead of explaining how revenue could beat estimates so badly with iPad sales some 600K weaker then expected. Or explaining how supply constraints due to the overly successful launch of the iPad likely lead to the weakness and how it might be overcome in the coming months. Or figure out how iPhone sales coming in at a strong 14M+ will lead to future iPad sales that could someday surpass the iPhone numbers.

All in all, the stock reaction in after hours is nothing more then profit taking. Clearly the numbers were blowout and signal the trend higher continues. The $500 target just reported on last week remains intact and even solidified with these numbers. Its very important to distinguish between profit taking on a good report and a sell off from a bad report. A bad report needs to be avoided while a scenario like AAPL's should be bought.

Another key is that an investor must know the real value of a stock. Is it trading at lofty valuations so that bad report might signal the top? Or is it trading at reasonable values to where a sell off is a load the boat moment? In the case of AAPL, the stock after hours trading at $300 sells at sub 15x eps estimates while growing easily at 20%+. We'll just ignore growth above 20% (net income up 70% this Q) and assume its not sustainable for a company the size of AAPL. Using 20 though, AAPL should trade over $400 based on earnings that will likely hit $22 in the current year now that AAPL has reported Q4 numbers. Highlighting another important factor in valuing them. Now that estimates for FY 2012 will roll onto earnings boards like the one on Yahoo! Finance, investors will begin focusing on future numbers that will be considerably higher. Don't get shaken out of this true value.


Apple Q4 summary - notice the huge cash balance:

For the fiscal fourth quarter ended September 25, the company posted $20.34 billion in revenue, with profits of $4.31 billion, or $4.64 a share, ahead of the Street at $18.86 billion and $4.06 a share. The company’s own guidance had been for $18 billion in revenue and profits of $3.44 a share.

After tax profits and revenue were both records.

Gross margin was 36.9%, down from 41.8% a year ago. The Street had expected margins of about 38%.
  • The company sold 3.89 million Macs, up 27% from a year ago.
  • Apple sold 14.1 million iPhones, up 91%.
  • The company sold 9.05 million iPods, down 11%.
  • It sold 4.19 million iPads in the quarter.
“We are blown away to report over $20 billion in revenue and over $4 billion in after-tax earnings—both all-time records for Apple,” CEO Steve Jobs said in a statement. “iPhone sales of 14.1 million were up 91 percent year-over-year, handily beating the 12.1 million phones [Research In Motion] sold in their most recent quarter. We still have a few surprises left for the remainder of this calendar year.”

For the December quarter, the company sees revenue of $23 billion and profits of $4.80 a share; the Street has been forecasting $22.22 billion and $5.02. {translates to a weak margin forecast, but get real people. This means an easy $5.75 number)

“We’re thrilled with the performance and strength of our business, generating almost $5.7 billion in cash flow from operations during the quarter,” added CFO Peter Oppenheimer. (Huge cash flow. The coffers pile up on a daily basis}

Apple finished the quarter with over $51 billion in cash, short-term securities and long-term securities. The company has no long-term debt. (Roughly $51 per share and growing on a quarterly basis)

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