Apple Needs a Killer Second Half

Apple (AAPL 1.27%) 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):

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.