January 25, 2015
Apple’s fiscal Q1 earnings are set to be announced Tuesday after the close. We have high expectations – not only for the quarter behind us, but also for the quarter ahead.
As we laid out in our early January post on $AAPL in 2015, we expect shares to trade around the 15x-19x PE range for a majority of the year. A stock trades within a valuation range that is based entirely on expectations. Expectations on growth, expectations on stable or growing revenues, expectations for new products, expectations on margin… you get the point.
VALUATION RANGE. As illustrated in the chart below, Apple tends to trades within a PE range of roughly 5x PE for an 18-24 month period. The valuation range shifts over time as the fundamentals of the business and investor expectations change. For the past six months, Apple has traded between a 15x-19x PE valuation. In our expectation, that range should stay in place as expectations for continued iPhone strength and a new product (Apple Watch) keep sentiment high.
UNIT SALES EXPECTATIONS. We expect Apple to deliver very strong earnings for the December quarter on an absolute basis, but also (and even more importantly) on a year-over-year basis. Our PE valuation above is based on the last twelve months, or trailing, EPS. Assuming a constant PE range, earnings growth over the prior year is what boosts share price.
- iPhone. We all know the story… Apple will sell more iPhone’s than it has ever sold by a huge margin. During the year ago quarter, Apple sold 51 million iPhones, which at the time was the most ever. We expect 69 million iPhone sales to be announced, a 35% YOY increase. That growth is driven by the popularity of the larger screen size (both the 6 and 6 Plus). Importantly, we also expect ASP’s to increase to $676, due to the shift in storage capacity along with the increased pricing of the 6 Plus.
- iPad. We expect iPad sales remained elevated during the Christmas quarter, but believe a significant drop will occur without any serious structural improvements in the form factor. The iPhone 6 Plus, of which we expect roughly 14 million were sold last quarter, is absolutely taking share from iPad sales. We expect 20 million sales last quarter – a 23% drop year-over-year. We expect ASP’s to be relatively inline with last quarter, at $425.
- Mac. We’re projecting 5.5 million Mac sales during the quarter – a 14% increase over last year and flat over last quarter. As we saw last year, we expect an increase in ASP to $1,300.
- Other. We’re expecting a moderate increase in iTunes revenue to $4.8 billion and Accessories to come in at $2.25 billion (including roughly $250 million from Beats).
EARNINGS EXPECTATIONS. Based on our unit sales and ASP projections, we’re expecting $69.97 billion in revenues for the quarter, roughly 7.5% higher than the mid-point guidance provided by management. This leads us to an earnings per share estimate of $2.67. Apple’s LTM EPS would increase by $0.60 to $7.03 per share.
GUIDANCE. We’re currently projecting $55 billion in revenues next quarter and gross margins of 38.6%. If management guides to a mid-point in the $53 billion range, we believe our current estimates will be relatively stable going into next quarter.
LOOKING AHEAD. Based on our valuation range and the new $7.03 earnings per share, we would expect shares of Apple to trade in a range between $106 and $134. This is one of the reasons we were increasing our long-term positions in Apple as shares hit $105 due to options expiration last Friday.
Looking ahead to Fiscal 2015 (ending Sept 2015), we have estimated relatively conservative assumptions and reached a LTM earnings number around the $8.50 level. This assumes a moderation in iPhone sales to 55 million next quarter, then 45 million and 42.5 million in the following two quarters. It assumes iPad sales struggle around the 10 million level over the next three-quarters, and between 4.75-5.25 million Mac’s sell each quarter. These are all highly defensible and, in our view, conservative numbers. We estimate 3.5 million Apple Watches are sold in the June quarter and 5 million are sold in the September quarter – again, conservative assumptions.
If our 15x-19x PE range thesis continues to hold, we would expect shares to trade in the $125-$155 range after September earnings are announced. The LTM EPS vs. Share Price chart below is supportive of the same fundamental story.
CHARTS: RISING CHANNEL. Apple twice re-tested the bottom trend line of its long-term rising channel over the past few weeks. It held and shares are now forming a longer-term bull flag. MACD is turning up and the RSI has plenty of room to the upside.
CHARTS: NEAR-TERM BOTTOMING PATTERN. Apple has formed a bottoming pattern over the past several weeks that can technically be interpreted as either a double bottom or an inverted head and shoulders. In either case, the target points to new all-time highs if shares are able to break through the $113 level. It’s also important to note that the 7 week downtrend line was broken late last week, easing the resistance to the upside.