iHypein the house
This will come as no big shock to some of you. I've been pretty hard on Apple (Nasdaq: AAPL ) . As recently as yesterday, I suggested that the firm might not live up to its skyrocketing stock price. You can read the full argument here. Then you can ignore most of it. Apple smacked the ball out of the park with yesterday's earnings release, and let me be the first to say that I was way wrong about a few things.
Here are the numbers: earnings of $0.70 per share for the holiday quarter. That's four times better than last year, nearly 50% better than most analysts had hoped, and nearly the equivalent of what the company earned for the entire fiscal year that ended last fall. Revenue of $3.5 billion was 74% better than in 2003.
I fully expected iPod sales to be outrageous. Let's face it; like it or hate it, this is the most popular machine on Earth right now. My main worries with Apple over the past several months have been these:
(1) CPU sales -- which should provide the bread and butter over the long term -- were lagging. Rumors of an increase coming from an "iPod halo" were not borne out in the numbers.
(2) Apple's historically high gross margins were slipping even as increased competition on the music player front would likely send them further down.
(3) The cacophonous din that is the iHype created a situation in which everyone from the shoeshine boy on up to Wall Street analysts were shouting "Buy!" No matter what the price.
For those keeping score, I was one of the few who thought last fall's overworried late arrival of the new iMac wouldn't deter interested Mac fans, but I still didn't think Apple would sell enough computers to measure up to investor expectations. I considered hedging my opinion until I saw last night's figures, but what fun would that be? Of course, when you talk smack, sometimes you get smacked back. Like now.
I'm still not convinced that this year's hot Macworld products are going to "change computing forever," as one analyst put it. If the iPod is Michael and the iMac is Janet, we just got a look at Jermaine and Tito. However, last night's results may just dull my skepticism for good. Apple sold a ton of computers and about a zillion iPods. (Actually, only 4.6 million, but that's almost a zillion.) If it continues to fly off the shelves, the music player will certainly eclipse CPUs as a revenue generator next quarter.
Here's better news. The long-hoped-for increase in computer sales finally materialized. The firm moved 26% more computers than last year. That's a major improvement, and it's vitally important. Those of you who read the 10K know that computers offer better margins. What's not so expressly stated is that CPUs are a much better vehicle for creating long-term Mac zealots than iPods alone. Big increases on this line not only help the bottom line, they also ensure a steadier stream of future revenues.
By far, the best bits are in the margins: The gross improved nearly two points, reversing the three-year downward trend I discussed yesterday, and setting the stage for a much more profitable earnings machine. SG&A dropped 3.5% as a portion of sales, helping net margins soar to 8.5%. That makes Apple more profitable than Dell (Nasdaq: DELL ) , for the time being. Absolutely amazing. Time for me to think different.
Looking at the $0.40 per share that management predicts for Q2, they expect the net to come down toward 6%, but that's still a vast improvement over Apple's historical rates, and it throws everyone's full-year estimates out the window. As someone who's not afraid to make a few bold predictions, I'll make one that should please Mac fans for once.
If Apple can keep this up, it wouldn't surprise me to see the firm turn in $2.00-$2.20 per share this year (not accounting for options, a potential spoiler we'll discuss more below). If the gang in Cupertino can hit that Q2 guidance -- and I'll bet they beat it -- they'll be more than halfway there. If the stock trades at $72 a stub today, it would be sitting on a forward P/E (based on my generous guess, remember) in the mid-30s. I'm going to have to say that looks reasonable given the popularity of the products and (the and here is especially important) the vastly improved operational efficiency. I might be a buyer in the $70s. I'd still be a holder in the $80s. But if Apple hits $100 as some analysts are predicting, I'd be back in "show me the money" mode. Here's why.
Giving away the iGreen
Shareholders continue to be diluted at an unbelievable and unacceptable clip, almost 13% since last year. That's a major outlay unbecoming a mature tech firm. Last night, an online gaming buddy of mine and some-time Apple investor described it as "arrogant." I think that's a mild assessment. For the time being, it is more than outweighed by the firm's profitability increases. But it bears watching. If Apple gave away more than a third of the firm's profits last year via stock options, what will the tally be for 2005?
You may get an inkling, as recent changes to accounting standards will require that Apple (and everyone else) expense these very real compensation costs which are, as of yet, still hidden in the footnotes where the shoeshine boys and most other iFans don't notice them.
To continue with my Simpsons theme, I believe that everyone who disagreed with me about the widening appeal of Mac computers has earned the right to a hearty Nelson Muntz "Ha ha!" For now, even this critic is a believer. If Apple can continue to do this voodoo, I might just have to pick up a few shares myself. If you bought this stock at $20, $40, or $60, congrats. But keep your eyes on the numbers that matter. The news and financial media aren't done with the iHype. There's nothing wrong with faith in a company, so long as it's not blind. Do the math and keep on the smart side of the bet.
For related Foolishness:
- Apple's Magic Act, sooo 24 hours ago.
- Apple is rotten, the timeless classic.
- Is not! The timeless rebuttal.
- Even our resident Mac fan wonders, "What's the deal with the stock?"
- Is Apple even a computer company?
Seth Jayson is heading to the store for some kerosene so he can torch his Windows machines and replace them all with Macs. When he's finished, he'll be picking up a black turtleneck, wire-rimmed specs, and a Volkswagen Beetle. He has also thrown away every non-iPod music device and painted himself and his dog bright white. But he has no position in any firm mentioned.