Next Quarter Could Be Apple's First $60 Billion Blowout

This fall, Apple (NASDAQ: AAPL  ) has rolled out updated iPhones and iPads (and even some new Macs) ahead of the holiday selling season. Despite the significantly updated product lineup, most analysts remain quite pessimistic about Apple's prospects this holiday season.

In fact, on average, the 38 analysts tracked by Yahoo! Finance expect paltry revenue growth of 2% in the December quarter. Many of these analysts believe that Apple's revenue will decline this fall, while even the most bullish analyst expects growth of just 9% (to $59.5 billion). Apple's preparing to release results for the September quarter on Monday.

iPhone 5s demand has been very strong so far, leading to supply shortages. (Photo: Apple.)

By contrast, I think Apple has a good chance to produce double digit revenue growth this fall, thus producing its first-ever $60 billion quarter. Strong demand for the iPhone 5s and a much-improved iPad lineup should help Apple improve upon its already-impressive results from last year. If Apple does hit this $60 billion milestone, the stock could potentially move back toward its all-time highs.

Breaking it down
The iPhone and the iPad are Apple's two most important product lines by far. However, Apple also gets revenue from selling Mac computers, iPods, accessories, software and services, and media and apps sold through iTunes and the App Store.

If we look at all of the categories except for the iPhone and the iPad, Apple produced $13.2 billion of revenue in the December quarter last year. In the last two quarters for which Apple has reported results, the company has grown revenue from these "other" categories. However, to be conservative, I will assume that revenue from these categories could decline year over year to $13 billion in the December quarter (although I also see $1 billion or more in upside to that revenue estimate).

Next, let's consider the iPhone and iPad categories separately to evaluate the revenue potential for each one.

iPhone can keep growing
Forecasting iPhone sales is particularly tricky at the moment. First, while Apple announced that it shipped 9 million iPhones on opening weekend last month, we don't know how many more iPhones were shipped in the last week of the September quarter (and thus pulled forward from the December quarter). Second, China Mobile is widely expected to start supporting the iPhone soon, but China Mobile iPhone sales may or may not begin during the current quarter.

However, there are good reasons to believe that Apple will be able to exceed the 47.8 million iPhones it sold in last year's December quarter. First, iPhone 5s supply still hasn't caught up to demand. In the U.S., Apple was recently quoting two- to three-week shipping times for all varieties of the 5s. While the major U.S. carriers appear to have an improving supply of the iPhone 5s, Verizon still complained that its iPhone sales last quarter were significantly constrained by supply shortages.

Moreover, Apple just launched the new iPhones in more than 25 additional countries on Friday, and it will launch more markets before the end of the quarter. To meet heavy demand for the iPhone 5s, Apple has reportedly boosted its orders by 75% in recent weeks.

The iPhone 5c may be gaining sales momentum this fall. (Photo: Apple.)

Meanwhile, the iPhone 5c probably hasn't been selling as poorly as some pundits believe. The sales gap between the 5c and the 5s has shrunk from a roughly 3.5-to-1 advantage globally in the first week of availability to approximately 2.3-to-1 today.

Based on these factors, I expect iPhone unit growth of 10%-15% year over year this quarter. Assuming that Apple sells 53.8 million iPhones (the midpoint of this range) and the ASP declines 2.5% year over year to $625, Apple's iPhone revenue would rise nearly 10% year over year to $33.6 billion.

Big iPad gains
By contrast, I expect much more robust sales growth for Apple's iPad. Apple has significantly improved the iPad lineup in time for the holiday season. Last fall, Apple launched a "new" full-size iPad in time for the holidays, but it was basically the same as the iPad that had been on the market since March, except for a faster processor. At the same time, Apple introduced the iPad Mini, but the company couldn't produce enough to meet holiday-season demand.

The iPad Air is the biggest redesign of the full-size iPad ever. (Photo: Apple.)

This year, Apple has totally overhauled the full-size iPad for the first time since March, 2011. The new version is significantly thinner and lighter, earning it the moniker "iPad Air." Apple also introduced a version of the iPad Mini that includes a "Retina" screen, which should be very popular, but will probably have severe supply constraints this quarter.

However, Apple is also keeping the older iPad 2 and iPad Mini tablets around, and the iPad Mini price has been dropped from $329 to $299 in the United States. Customers who have trouble finding an iPad Mini with Retina display will have the option to trade down to the iPad Mini or up to the iPad Air if they don't want to wait. (By contrast, last year, the closest substitute for the supply-constrained iPad Mini was the much bulkier and more expensive iPad 2.)

As a result, I think iPad unit sales could jump significantly to around 30 million this fall. The average selling price will be pressured by the iPad Mini price drop and higher supply of the iPad Mini, but this effect could be offset by strong demand for the iPad Air. Assuming a 3.5% drop in the ASP to $450, iPad revenue would rise more than 26% to $13.5 billion.

Foolish bottom line
Analysts are probably being too pessimistic in their estimates for Apple's December quarter revenue. While growth has been anemic in the past two quarters, new iPhones and big improvements to the iPad product line should boost revenue growth. If iPhone revenue grows to $33.6 billion, iPad revenue jumps to $13.5 billion, and other revenue stays roughly stagnant at $13 billion, Apple would hit the $60 billion revenue mark for the first time.

The biggest boost would come from the iPad product line, which has been the biggest drag on Apple's results this year. The new iPad Air will reinvigorate demand for full-size iPads, while the iPad Mini should be available in bountiful supply for gift-givers this year. The result could be a return to strong profit growth for Apple and significant multiple expansion for its stock.

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Read/Post Comments (5) | Recommend This Article (4)

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 October 26, 2013, at 1:41 PM, gametv wrote:

    Analysts are always behind the curve on changes in the growth of a company, both on the upside and downside. It is much safer to project revenues and earnings that are similar to the past, even if products and markets have changed significantly.

    I believe that the upside to the iphone sales is greater than 10% yoy growth. The increase in production on the 5S by 75% indicate a complete blow-out of last year's numbers. This year they also have the 5C which will sell well towards Christmas, and they have also retained the 4S at a lower price point than previous years. Additiionally, the launch in more markets will bring sales forward into the 4th quarter. Upside on iphones of even 20% or more is very reasonable.

    I would say that my view on the ipad is about in line with the article. While the line is much deeper this year, there is more competition, so I would hestitate to see any increase in growth.

    Finally, on the other categories, the software area should generate significantly more sales than previous years and the recent launches of imacs just needs to meet last year's numbers to see positive numbers in this area.

  • Report this Comment On October 26, 2013, at 2:30 PM, johnestromjr wrote:

    Adam, Excellent case you make for a $60 Billion quarter and a well articulated article - the assumptions you make are reasonable given Apple is opening in many more countries and there should be less supply constraints as was experienced last year. The new iPhone lineup should see record sales this quarter with a minimum loss due to smaller margins. If China Mobile and Apple ink a deal that will be huge given the iPhone 5C was specifically designed for China Mobile's 3g TD SCDAM system and the vast majority of China Mobile's 745 million subscribers are on that unique [and obsolete] system.

  • Report this Comment On October 26, 2013, at 3:04 PM, clutch1958 wrote:

    Why don't they bring their manufacturing to the US, if they are making such a profit? Where are the ones that falsely claim that Romney shipped jobs overseas, and their complaints about other manufacturers that outsourced jobs to China?

    Where is the liberal outrage?

  • Report this Comment On October 26, 2013, at 11:35 PM, riwaterman wrote:

    The MacPro is now made in the USA

  • Report this Comment On October 26, 2013, at 11:36 PM, riwaterman wrote:

    @clutch1958

    the MacPro is now made in the USA.

    Why don't all the other companies make their gadgets in the USA?

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