Daily Archives: January 28, 2013

Apple January (Q1) 2013 Earnings Review

January 28, 2013 (1:30 pm)

We compared our estimates (Three28 Est.) to the actual results and management’s guidance. Apple’s management only provides guidance on a few figures. You can review the earnings preview we provided before the report here.

Three28 Est. Actual Guidance Actual/Three28 Actual/Guidance
Mac Units 5,250 4,060 (22.7%)
Mac ASP $1,340 $1,359 1.4%
Mac Revenues $7.035bn $5.519bn (21.5%)
iPod Units 12,500 12,679 1.4%
iPod ASP $150 $169 12.7%
iPod Revenues $1.875bn $2.143bn 14.3%
iPhone Units 54,000 47,789 (11.5%)
iPhone ASP $640 $642 0.3%
iPhone Revenues $34.560bn $30.660bn (11.3%)
iPad Units 25,000 22,860 (8.6%)
iPad ASP $495 $467 (5.7%)
iPad Revenues $12.375bn $10.674bn (13.7%)
Software & Other $4,225 $5,516 N/M
Total Revenues $60,070 $54,512 $52,000 (9.3%) 4.8%
Gross Income $23,427 $21,060 $18,720 (10.1%) 12.5%
Net Income $14,656 $13,078 $11,137 (10.8%) 17.4%
Gross Margins 39.0% 38.6% 36.0% (1.0%) 7.2%
EPS $15.41 $13.81 $11.75 (10.4%) 17.5%
Cash Per Share $143.28 $144.75 1.0%

Mac Business: We severely overestimated the potential impact of Apple’s mac business this quarter. Tim Cook explained that Apple sold every Mac it could produce this quarter. They were very constrained on the iMac side, which he hoped to have a better grasp of this quarter. Further, Cook also emphasized the cannibalization effect that the iPad is having on the mac business. While this may seem counter-intuitive, it’s a positive development. We’d rather have Apple cannibalize its own products than a competitor do it. On the upside, the average selling price was 1.4% higher than our expectations. It seems that consumers are choosing the higher-capacity, higher-priced models.

iPod Business: iPod sales were right in line with our expectations. While sales dropped from the year ago quarter, it was a more limited drop than many analysts had expected. While the total number of units dropped year-over-year, the average selling price actually rose. This is a sign that many users are choosing the more expensive iPod Touch than less expensive models. This brings more users into Apple’s iOS ecosystem, as the Touch uses the same basic software as the iPhone and iPad. Users will buy music, movies and other content on this device and feel compelled to stay within Apple’s “walled garden”.

iPhone Business: We were disappointed by Apple’s lackluster iPhone sales. We overestimated unit sales by 11.5% and expected the domestic market to take up a smaller portion of total sales. Since the company introduced and shipped the new iPhone to over 100 countries before the end of the year, we even saw significant upside to our 54 million unit estimate. We were proved wrong. While still speculation at this point, the anecdotal stories and rumors of Asian consumers preferring larger screens may prove accurate. We hope and expect Apple will not ignore this market. That said, the average selling price remains at the three-year average, assuring us that Apple has not discounted the price of its phones.

iPad Business: While we were initially disappointed by the number of iPads shipped this quarter, we need to give the company time to ramp up production of the iPad mini. We expect the smaller sibling of the iPad will quickly overtake the original. The fact that ASP dropped by the degree that it did leads us to believe that it may have overtaken the iPad this quarter, but we wouldn’t know since Apple doesn’t break out those figures. iPad mini’s were severely supply constrained this quarter. We know demand is enormous, especially overseas. This will be an extremely important product for Apple going forward. While the per unit profit is, of course, lower than that of its larger sibling, the iPad mini likely has very similar profit margins (as a percent of revenue). The sheer volume of its sales should limit any future impact on the dollar amount of profits.

Software and Other: Apple changed the way it reports software and accessories. Therefore, our estimates are not an apples-to-apples comparison with the actual figure. We suspect that Apple did this to prove to investors and analysts that recurring software sales is an important part of the story. It will prove the value of Apple’s ecosystem.

Revenues: We overestimated revenues by almost 10%, driven primarily by the disappointing iPhone sales and the production constraints of the iMac line. Had Apple been able to produce enough iMac’s or iPad mini’s this quarter, the company very likely would have reported a beat on the top to join its beat on the bottom line. It’s important to remember that this quarter was 13 weeks vs. last year’s 14 week December quarter. When viewed in the light, Apple earned $4.2 billion per week this year compared to $3.3 billion per week last year. That proves that there’s really no lack of growth in this story. 27% year-over-year growth is nothing to sneeze at.

EPS: Apple’s EPS came in $1.60 below our estimate. This was driven entirely by our high revenue expectations. We estimated gross margins to come in at 39.0% vs. Apple’s guidance of 36.0%. The actual gross margins came in at 38.6% – very close to our estimate.

Cash Per Share: Apple added almost $16 billion in cash to its balance sheet (even after it paid its last dividend). It reported $144.75 per share in cash, which was less than 1% from our estimate.

Stocks to Watch (Part 5)

January 28, 2013 (11:30 am)

We’re updating these later than we hoped. We spent a lot of time over the past few days refining our site and were distracted from the underlying charts. Anyways… happy to be back to the fun stuff. Here are the charts we’re currently watching.

Apple. Whew. What a week for Apple. We drew out the chart below during the “parabolic” run in March of 2012, just as the shares were climbing up the (green) “bump” line. The chart illustrates a typical Bump and Run pattern. It was just something we were keeping an eye on, and it’s hard to believe that it came through to fruition. What happens is this. A stock is steadily climbing up the (blue) “run” line, before experiencing a dramatic rally (the bump). After spending some time climbing up the green bump line, they shares fall back to the blue run line. Subsequently, you’ll most often see shares retrace the entire rally and fall back to where they initially began the parabolic aspect of the rally. It can be argued that the bump began either before or after the post-earnings gap in late January – so either $425 or $440. The shares have since found support at that $440 level.


Apple’s Falling Wedge. Continuing on with another Apple chart, we’re taking another look at the falling wedge that we outlined numerous times in the past. We hoped – and expected – that an earnings bump would break the shares to the upside. Clearly, that was wrong. We experienced a dramatic breakdown. From a strictly fundamental point of view, the shares are deeply undervalued here in our view. 10x LTM earnings is simply too low. Even if growth was completely done for Apple, we should see it trade more in line with Microsoft, which is trading at 14x LTM earnings. So with that, it wouldn’t be shocking to see the recent drama in the price action represent a false breakdown of the falling wedge. When we look back, the current $450 level may be akin to the $644 level in late March 2012 – simply a momentum trade without fundamental backing. With sentiment in the toilet and every voice on CNBC calling for the low $400’s, $300’s and some even expecting $200’s, now may be the right time to get back in (for those who aren’t already). Shares can become overextended to both the upside and the downside. We believe it has simply moved too far too fast to the downside. A relief rally should take hold, which may give fundamental buyers more comfort to get back in.

AAPL Falling Wedge

Amazon. We went short Amazon on Friday afternoon, as it hit the top trend line on overbought conditions. There should be a pull back and consolidation here.


Broadcom. BRCM is sitting at the bottom trend line of a rising wedge, after we saw a false breakout to the upside. We expect to enter a bearish position on a breakdown.


Berkshire Hathaway. We entered a bearish position in BRK.B a couple of weeks ago, and it has continued to rise. We’ve highlighted “overbought” Chi-Osc conditions over the past year. 7 of the last 10 times we saw these levels has led to a sell-off. Two of the remaining three instances saw at least consolidation, if not a slight pull back. The only time it continued higher was when we took a bearish position. The sell signal was triggered again late last week, so we feel comfortable holding our position. The shares gapped well above their upper Bollinger Band two weeks ago and hasn’t even consolidated since then. Further, over the last three days, we’ve seen an “evening star” form – a bearish topping pattern. It forms when a large white candlestick is followed by a black candle (that begins at a higher price, but closes below the top of the previous candle). It is followed by a red day, verifying the pattern.


Gold ETF. GLD formed an enormous falling wedge over the past three months. We entered a bullish position when the shares broke out. A bull flag we had hopes would push the shares higher failed, and we’re again re-testing the upper trend line of the wedge. We’re still comfortable holding our position here and expect higher prices ahead.


Google. GOOG has formed a number of wedges over the past few days. First, there’s a three month rising wedge (blue). Second, the shares formed a bullish falling wedge as it broke out of the larger one. It gapped up back into the larger wedge and is now forming another bearish rising wedge. And it’s doing so with negative divergence. We entered a bearish position on Friday afternoon as it touched the top trend line.


Netflix. Another doozy. We went short NFLX as it touched the top trend line of a multi-month rising wedge and entered overbought conditions. It has since surged higher. We took another bearish position on Friday afternoon. We believe it will fill at least some of the enormous gap that remains open, but are watching closely.


Nike. We entered a NKE long position as it slowly broke out of an ascending triangle. On Friday, the shares hit our $55.50 price target, so we sold our position.


Research in Motion. Shares of RIMM leaped out of an ascending triangle over the past two weeks. As it surged past our expected price target of $14.50, we entered a bearish position with the expectation that it would retrace a portion of its rally. The shares, instead, continued climbing. RIMM shares trade primarily on momentum. We expect that this move will be done shortly and momentum traders will bring shares the other way. RIMM introduces its new operating system on Wednesday. We’ll wait to see what happens there. With the shares up 100% in the past three months, expectations are through the roof. We don’t expect these prices to hold.