Apple Needs a Killer Second Half

With a first half of the fiscal year off to a less-than-stellar start, Apple's going to need fireworks to finish of the year meaningfully higher than where it trades today.

Mar 15, 2014 at 12:45PM

Apple (NASDAQ:AAPL) is dirt cheap, especially if you strip out the cash that the company has on the books. With plenty of cash in the bank, the world's strongest global brand according to Interbrand, and products that form an ecosystem that hundreds of millions of users enjoy, the company has been able to exhibit what is most likely the most impressive growth story that Wall Street has seen in many years. But the revenue growth slowed considerably during 2013 and, to rub salt in the wound, net income actually declined during that year. With 2014 off to a decent start, Apple's going to need a heck of a second half of the year to really return to top-line growth.

The scorecard so far
In order to understand what's going on here, it's useful to take a look at net income by fiscal quarter for Apple during 2012, 2013, and so far in 2014 (FQ1 as well as FQ2 guidance range):






Full Year



















Source: Apple's 10K/Q Figures in Billions

So far, it's looking like Apple is on track for yet another year unless it can do something to buck the rather harsh seasonal declines that hit in FQ3. What's interesting is that there is an aura of mystique surrounding the current year's results as investors really have no idea what Apple could be preparing in the pipeline. Apple could very well simply do the whole iPhone in September/iPads/Macs in October bit, which wouldn't really help the current year, but this would go against the following statement from Tim Cook made on the FQ4 2013 call:

But what I have said is -- I have said that you would see some exciting new products from us in the fall of this year and across 2014.

Further, it would contradict the following reaffirmation from Cook on the FQ1 2014 call when asked whether new product categories would roll out in 2014:

Yes, absolutely. No change.

So, in order to "save" this year's results, Apple is going to need a product introduction that materially impacts at least the FQ4 results if not the FQ3 results (although the timing would be pretty tight for an FQ3 revenue impact at this point -- the product would need to launch within the next month or so).

What does Wall Street think?
The revenue consensus sits at about $181.05 billion, according to Yahoo! Finance. This would mean that assuming gross margins for the full year come in between 37-38%, and assuming operating expenses of $17.6 billion ($4.4 billion/quarter SG&A and R&D average), and a tax rate of 26.2%, we're looking at net income somewhere in the vicinity of $36.45 billion to $37.7 billion, with the midpoint at $37 billion or flat year-over-year. Now, if Apple is able to drive some pretty significant upside to these numbers, then the stock will trade meaningfully higher from the $536/share level. But that is a huge "if" at this point.

So, prognosis?
At the very least, Apple is still growing sales and its gross margins have largely stabilized, but it's still investing pretty heavily in R&D, so any meaningful bump from the current run rate would lead to downside to these estimates, putting Apple in squarely negative-for-the-year territory. In order for Apple to really move higher, the company needs to drive net income growth again. Increased sales will help, but with operating expenses still on the rise (presumably to invest in Apple's future), that sales growth will need to be much faster or Apple is going to have to find a way to improve its corporate gross margin percentage.

This is one way Apple can achieve that killer second half
If you thought the iPod, the iPhone, and the iPad were amazing, just wait until you see this. One hundred of Apple's top engineers are busy building one in a secret lab. And an ABI Research report predicts 485 million of them could be sold over the next decade. But you can invest in it right now... for just a fraction of the price of AAPL stock. Click here to get the full story in this eye-opening new report.

Ashraf Eassa has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information