Why I'm Predicting an Apple Earnings Blowout

For a small device, the iPad Mini sure looks like a big catalyst.

Early reports said Apple (NASDAQ: AAPL  ) would order 10 million of the tablets for the holiday quarter. Now, according to Citi, it looks like close to all of them sold, while first-quarter projections call for another 12 million to 14 million Minis to make their way into the channel.

Has anyone actually stopped to consider what this means? The more profitable Mini gives Apple its best shot at maintaining premium profits at a time when tablet rivals Amazon.com and Google (NASDAQ: GOOGL  ) have sharply cut prices on similarly sized models.

Indeed, the lowest-priced Mini will cost you $329 while the Kindle Fire HD and Nexus 7 tablets remain at $199 apiece. Apple is asking shoppers to pay a 65% premium -- which they are, gladly.

You can put me in that group. Santa brought me a Mini that I've already used far more than the now-defunct Galaxy Tab I got at Google's I/O developer conference two years ago. Why? Portability doesn't result in a functional downgrade. If anything, the Mini and its wide selection of apps for consuming books, TV, movies, and radio make it the best entertainment device I own.

Millions of consumers agree. By my math, the Mini probably brought in $2.2 billion in operating profit in fiscal Q1, equal to 12.7% of the $17.3 billion Apple took in last year at this time. The Mac maker sold 15.4 million iPads in 2012's fiscal first quarter. This year's Q1 could see at least 20 million sold, thanks in no small part to the Mini's popularity.

All of which raises two questions: How is it Apple is only rallying 3% today? And why aren't price targets inching upwards when concerns over gross margin appear to be overblown?

Momentum seems to be the issue. Investors have a way of souring on a stock for months at a time, only to revisit the business after an earnings blowout, which is exactly what I'm predicting for Apple. No less than a 10% beat on earnings, billions more in cash flow, and a slight dividend increase heading into the rest of the fiscal year. Think I'm right? Wrong? Please weigh in using the comments box below.

Apple has been a longtime pick of Motley Fool superinvestor David Gardner, and it has soared more than 215% since he recommended it in January 2008. David specializes in identifying game-changing companies like Apple long before others are keen to their disruptive potential, and he helps like-minded investors profit while Wall Street catches up. Learn more about how he picks his winners with a free, personal tour of his flagship service, Supernova. Inside, you'll discover the science behind his market-trouncing returns. Just click here now for instant access.


Read/Post Comments (13) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 16, 2013, at 6:52 PM, pranjan wrote:

    I couldn't agree more. I have had a first gen kindle fire, got a nook and an ipad mini. There is not comparison - ipad/mini are just way better for overall use - hard to beat on the app front. Everything just works.

  • Report this Comment On January 16, 2013, at 6:56 PM, evanmacdonald wrote:

    I think you'll be proved right, I find it hard to believe that first quarter earnings estimates are still lower than what they actually earned in the same period last year, despite two new successful product releases over the holidays, the iPhone5 and the iPad mini.

  • Report this Comment On January 16, 2013, at 7:06 PM, TMFGemHunter wrote:

    I agree that Apple will beat on earnings for FQ1. However, I don't see how you came to your $2.2 billion operating profit estimate. Based on 10 million Minis sold, that would imply $220 profit per device, which doesn't seem plausible. Assuming an ASP of $400 (which might be too high; I would guess that most people opted for the base $329 model), and gross margin of 30% (well below Apple's corporate average, as Tim Cook put it), the profit per device would be $120.

    I think the Mini will expand the iPad's addressable market and could add perhaps $2 to annual EPS, depending on cannibalization rates. But in my opinion, this earnings report is all about the iPhone: iPhone sales, iPhone ASPs, and iPhone gross margins.

  • Report this Comment On January 16, 2013, at 7:13 PM, SuntanIronMan wrote:

    Predicting what is going to happen next Wednesday seems awfully short term. Everybody is always trying to guess what the next earnings release is going to say. No real need to predict anything. We will all know for sure in a handful of days. Tell me what's going to happen next year, or better yet, five years from now.

  • Report this Comment On January 16, 2013, at 7:32 PM, Microwave52 wrote:

    The iPad mini will prove to be a huge success in China and elsewhere in the developing world due to its smaller size and lower price vis a vis other iPads. With Chinese New Years just around the corner, expect excellent sales of this product through the March quarter.

  • Report this Comment On January 16, 2013, at 7:43 PM, OneSwede wrote:

    I agree that the $2.2 billion may seem on the aggressive side, but I believe an ASP of $400 is actually on the low side, rather than the high (as hypothesized by adamathm above). The split between the various models would have to be extremely skewed towards the 16 GB WiFi-only model, and I believe that is too conservative. The small sample of Mini owners that I have encountered have all opted for higher spec models, both memory, but also a fairly large portion of 3G/4G-enabled to fully benefit from the Mini's great portability when on the move.

    If that's true on the macro scale, remember that Apple's incremental margins on the extra $$ for the bigger models are huge (like 80-85% for the extra $100 for Flash memory). The cost of the 4G-module is also vastly far from the $129 price tag.

    In conclusion, should Apple have made a huge Mini quarter, it could definitely be a meaningful booster to a blowout EPS number for FQ1. I sure hope so.

  • Report this Comment On January 16, 2013, at 7:48 PM, jamesdan567 wrote:

    Apple's really too big for me to analyze :-), so I dont. But I have all apple products in the home and they work together great. I want to get the mini ipad, but I am holding out for the next release with a retina screen.

    Five years from now is easy. faster, smaller, better, just like now is compared to 5 years ago. with the transition starting with 4G, Apple and others will do well. Cook has already told us the deal with China Mobile is cooked and ready. Why else would he say China would be Apple's biggest customer? :-)

  • Report this Comment On January 16, 2013, at 7:54 PM, TimKnows wrote:

    And guidance will trash the stock.

  • Report this Comment On January 16, 2013, at 8:25 PM, Bujutsu wrote:

    With the 20%+ drop in Apple's stock price recently, I decided to double my (rather small) position. I figured that the new line of products, the end of the years sales will be better than expeceted. I plan on holding for the long term, but these short term drops are an excellent place to add to a position.

  • Report this Comment On January 16, 2013, at 8:42 PM, OceanJackson wrote:

    Momentum is THE KEY factor for all technology stocks. Today's share-price reflects an utter lack of momentum. It also reflects the end of the late great Steve Jobs' after-glow, which is nearly all of the momentum decline.

    Apple is cheap. With an earnings blowout and a new product-line announcement, it can skyrocket very, very quickly.

    I for one am betting on both of those things to happen shortly.

  • Report this Comment On January 16, 2013, at 11:18 PM, TMFMileHigh wrote:

    Thanks for the comments all. To be clear, I should have made reference to gross profit, not operating profit. $2.2 billion in mini gross profit would equal 10.6% of the $20.7 billion in total gross profit Apple generated in last year's Q1, so still a significant contributor.

    Now, where the rest of the math came from:

    * Per the article, Citi's channel checks suggest Apple sold most of its minis in Q4, or what earlier reports would suggest was 10 million units. I used this as a base since I witnessed delays in my own shopping and elsewhere. The pattern fits.

    * We have an idea of mini gross margin thanks to an iSuppli teardown. My colleague Evan Niu has the data here: http://www.fool.com/investing/general/2012/11/05/this-is-why...

    * I took the average of gross margin at the low end ($141) and the high end ($294) to arrive at $217.50 per mini sold. Over 10 million units, that's $2.18 billion in gross profit which I rounded to $2.2 billion.

    I've certainly been wrong before and could be again, but given all the signs of outsized demand I like the odds of Apple having sold 10 million minis during the holiday quarter.

    FWIW and Foolish best,

    Tim

    --

    TMFMileHigh in CAPS and on the boards

    @milehighfool on Twitter

    http://timbeyers.me

  • Report this Comment On January 17, 2013, at 8:15 AM, greenember wrote:

    I don't think anyone is doubting that Apple had a great holiday quarter. The question is, where do they go from here? Too many are basing their estimates on past performance instead of looking towards the future. I don't see Apple maintaining their strength. A previous commenter noted they feel Cook already has a China Mobile deal sewed up. I doubt that since there would be no compelling reason to wait to announce such a deal as every day that passes is more lost sales. Apple needs China Mobile more than China Mobile needs Apple and that is NOT where Apple is used to being...

  • Report this Comment On January 17, 2013, at 9:06 AM, JiminyBillyBob wrote:

    In my opinion, when you say Apple needs China Mobile more than China Mobile needs Apple, that is way too black and white. Didn't Apple sign with the smaller carriers, who have been taking customers from China Mobile? China Mobile isn't competing with Apple...it's competing with the other carriers.

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