Analyzing Apple’s Guidance

This article also appeared at The Motley Fool.

In Apple’s (NASDAQ: AAPL) Investor Conference Call, CEO Tim Cook and CFO Peter Oppenheimer talked about the company’s new method of issuing guidance. This is what their release said:

Apple is providing the following guidance for its fiscal 2013 second quarter:

• revenue between $41 billion and $43 billion
• gross margin between 37.5 percent and 38.5 percent
• operating expenses between $3.8 billion and $3.9 billion
• other income/(expense) of $350 million
• tax rate of 26%

When asked about the range as opposed to the point guidance, Peter Oppenheimer said that Apple will be within the range “as best as they can” so the range is no longer the conservative guidance that we are used to. This is a welcome change as it will hopefully end the guessing game every quarter.

The one thing missing compared to previous quarters is EPS guidance. But Peter Oppenheimer told Gene Munster of Piper Jaffray that he could figure out the EPS from the numbers above. Walter Piecyk of BTIG has done the math for us and come up with $9.23 – 10.23. This is a bad sign for Apple and not including the number was in poor form.

The conference call twice eluded to being able to sell more if they made more. Now personally I call that an ego problem at Apple causing them to shift away from Samsung. Steve Jobs is dead. Time to stop the war against Samsung (and Android in general). In fact there were several other ego related tidbits in the conference call such as

The iPhone 5 offers as you know a new 4-inch Retina display, which is the most advanced display in the industry and no one comes close to matching the level of quality as the Retina display. … So, we put a lot of thinking into screen size and believe we’ve picked the right one.

– Tim Cook

When other phones start getting 5″ 1080P screens, the retina display on the iPhone5 is outdated. In fact it is even outdated compared to old previous generation phones with 720P displays like the Galaxy Nexus. Also, whatever they believe, people want choice. The Apple attitude – “if you want the latest features get the biggest phone” is probably causing people who like smaller screens to stick with the older iPhone 4S. People want all sizes with the latest specifications. And people who are already used to and prefer larger screens will not convert to the relatively tiny iPhone screen with a lower resolution.

Also it is enough to mention it once that you make the best products. In the conference call Tim Cook mentioned “very best products in the world,” “best customer experience in the world,” “best work of their life,” “create the world’s best product,” “our best products ever,” “best products in the world,” “only the best products.” So best was used over and over. In addition to that we had “unprecedented,” “unmatched,” “stunning,” and other synonyms. Enough already. We get it.

If we are to believe this guidance, the exponential growth of Apple will not apply to next quarter at least as far as EPS is concerned. However the stock price reaction to the earnings is completely unjustified – I predicted a drop to $450 if Apple misses in my pre-earnings article. This would be a good time to buy some Apple stock. For a company that carries a cash pile of $137 billion and is expected to make a profit of around $45 billion in 2013, the stock is significantly undervalued compared to peers like Google and Amazon.

Growth at the midpoint of $42 billion in revenue would be 7% over the same quarter last year and EPS would actually be lower by 20%. That is what spooked investors even though the reason for this is simple – more growth in emerging markets means gravitation to lower margin products. This quarter was the first in at least 16 quarters where Apple’s EPS was lower than the same period in the previous year. And next quarter might be the first ever significant decline.

However with the introduction of newer generation products, I expect that the EPS will grow after next quarter. I still maintain that it is a good buy at the current $450 level.

Disclosure: Long AAPL, GOOG

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