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Apple Inc. 2010, Fourth-Quarter Stock Analysis

‘Two men were discussing how to make extra money.  One man says to the other, "I am thinking about getting into Egyptian real estate."

"Oh really?" asks the other man.

The first man replies, "Yes, but I am afraid it is a pyramid scheme." ‘ – Unknown comedian

 

Apple - the Broad View

 

When you are wrong you are wrong.  I was wrong about Apple but so were the Bears.  I thought Apple would report $15-$18 billion in total revenue for the fourth quarter of 2010.  Maybe $20 billion in revenue - tops.  Instead Apple reported an astounding $26.7 billion in total revenue!  First let us take a look at the graph of this revenue over the last few years.

 

 

Notice that Apple's total revenue has very nearly doubled in the space of one year (87%).  In my previous article about Apple, I wrote that it was astounding that Apple doubled their total revenue in the space of two years.  They are nearly $7 billion over the high-end estimation.

 

This article is not designed to replace my prior Articlesbase article, "Apple Inc., a Stock Analysis for December 2010 – Buy a Bushel Basket of Apple Stock".  This article instead updates that financial information to what is now known about Apple.  The basic profit drivers are still the iPhone, iPad, computers, laptops and media.  Where the numbers are different from the original article I will point them out in this article.

 

Fundamentally, Apple is still financially solid and hugely profitable.  The basic premise of the original article still holds.  Buy Apple shares now and hold them until the end of 2011.  You shall be very grateful to Mark Elliot Investments that you did.

 

Yes, Apple shares have raised from just over $240 to $340 a share.  This took place from late August of 2010 to the middle of January 2011.  It is a fair question to ask is Apple too high?  The answer involves taking a look at the PE ratio.  As of mid January 2011, Apple's PE ratio stands below 19.  This is after their incredible share price run-up.  This has everything to do with their incredible run-up in revenue and profits.  Apple is producing large amount of profits for every share that is outstanding.  To the point, Apple's profitability increased slightly for the last quarter.  This keeps them at a value point.  By comparison, Google's PE is just over 23.  NVIDIA who makes a very popular video chip used in cell phones and other portable devices is over 67.  Apple is still lower in valuation than these other technology companies.

 

Historic PE averages are around 16 for the S&P 500.  When companies get over this value, they need to justify the expense with high expectations of future growth.  The higher the PE ratio above historic norms, the more vulnerable the stock is too bad news and thus a collapse in its share price.  We all remember the tech bubble, right?  Technology companies, historically run higher than the average PE ratio of 16.  They oftentimes are in the 20s.  This is traditionally because technology companies offer higher rates of growth than other industries.  At the very least, investors are historically more willing to pay for a technology company than other types of companies.  At a PE ratio of 19, Apple is still not much above the historic average and is low for such a well-run technology company.

 

Apple is still a tremendous value.  In fact, Apple's PE is even lower now than it was when I wrote the original Apple article in early December 2010!  Simply put, Apple has created so much profit, that the broader stock market has not caught up with this idea.  When they do, Apple stocks will go significantly higher.  Many analysts are now calling for Apple shares between $400 and $500 a share by the end of 2011.  As we have seen, who knows, these figures could be too low.  If Apple doubles their revenue again in another year, we could see a figure around $700 per share.

 

Apple – the Detailed View

 

Now let us start to break down Apple's revenue in detail.  The centerpiece of Apple's revenue generation is the iPhone.  Peter Oppenheimer is the Chief Financial Officer of Apple Inc.  Peter reported 16.24 million iPhones were sold during the last quarter.  When you include the accessories, media and apps for the iPhone, this was $10.47 billion in revenue for Apple.  This is not quite double the total number of units sold a year ago.  Apple believes that the new iPhone selling on the Verizon network shall raise unit sales and profits even more dramatically.  The reason why is Verizon's network is more popular with consumers than AT&T's network.  Until very recently, AT&T had an exclusive contract for selling iPhones.  Notice in the graph below, a huge pop in iPhone sales.  Just imagine what it shall be like after Verizon sales kick in.

 

 

Peter went on to report that 7.33 million iPads were sold.  This represents $4.61 billion in revenue.  Apple originally projected 7.1 million iPads for the end of 2010.  This was above Apple's forecast.  However, this is significantly below the iSuppli forecast of 12.9 million units in my original article.  Nonetheless, the dramatic increase in iPhone sales more than offset the lower iPad numbers.  In one way, the iPad launch is more successful than the iPhone launch.  In just three quarters, iPad sales are equal to 7 million units.   It took the iPhone five quarters to get close to this number and 10 quarters to stay consistently above it.  When taken together, the sale of iPhones and iPads are well over 50% of the total revenue figures.

 

 

In the third-quarter of 2010, Apple was taken by surprise with the popularity of both the iPhone and the iPad.  A serious limitation was getting enough parts to build these units.  Apple has since fixed the supply pipeline problem according to Tim Cook, Apple's Chief Operating Officer.  This explains part of the large jump in revenue.  Another factor, Christmas sales were much better for 2010 than they were in 2009.  It looks like the iPhone and the iPad were the popular gift to give!

 

Apple store sales are still incredibly strong.  Apple stores brought in $4 billion worth of revenue.  They set sales records for the month of December, 2010.  Apple is currently selling products in 46 countries and planning on adding another 15 this January.  For example, Peter reported that the four Chinese Apple stores had the highest average revenue of any other Apple store.  Foreign sales are a huge part of Apple's total revenue.  Worldwide sales are growing at a faster rate than US sales alone.

 

Not only were Apple store sales good but Apple computer sales were good as well.  Apple sold 4.13 million Apple computers.  This is up 23% from a year ago.  Also, half of the customers in December buying Apple computers were new to Apple.  This means that Apple still continues to take market share from the traditional PC companies.  It also dispels the idea that Apple cannot sell new, more traditional, computers because of their new iPad.

 

Still, Apple faces some challenges.  The most important question is can Apple continue on without Steve Jobs?  Steve Jobs has left Apple because of medical problems.  More than likely, these medical problems are due to cancer.  Tim Cook addressed the issue and said that Steve has created quite a culture of excellence.  He felt that the culture should stand without the day-to-day input of Steve Jobs.  In addition, their product pipeline is full and well planned.

 

It is the view of Mark Elliot Investments that Apple will continue having a stellar year through 2011 without Steve Jobs.  He shall be missed.  But because of the length of product development cycles, the earliest that Steve Jobs is actually missed is a year.  Also remember that Tim Cook ran the company before without Steve Jobs for a period of nine months.

 

Apple faces yet another challenging problem.  Apple is receiving stiff competition from Google's Android operating system based portable devices.  Total android unit sales surpassed iPhone sales in the last quarter.  There are numerous manufacturers making cell phones and tablet computers that support the Android operating system.  Tim accurately points out that Apple is still well ahead in the development of mobile devices.  Further, Apple is not resting on their success and they are developing new features and products based on their successful iPhone and iPad devices.  This should keep them ahead of competition for at least another year.

 

It is Mark Elliot Investment's opinion that Android is the most serious threat to Apple's future.  Remember when IBM and Apple made more expensive personal computers?  Then the inexpensive PC clones came out and the personal computer marketplace was revolutionized.  Apple will need to keep strict control of their features, costs and quality to stay ahead of Android.  Still, Tim Cook is right.  Apple probably has another year before Android can compete with them toe to toe.  If you want to hedge your bets in this area, you can always buy some of Google's stock.  Remember, you do not have to bet on one horse to win when you own stocks!  However for me, I think there are other opportunities that have better appreciation potential than Google.  I shall be reporting on them in another article.

 

A third and less significant challenge is Apple's older iPod product is dropping off in sales.  Apple freely confessed that iPod sales were down 7% from last quarter.  This is a trend that has developed over several quarters now.  They are likely cannibalizing iPod sales with the new iPhones and iPads.  Nevertheless, the newer products more than make up in revenue for this lost revenue on the older ones.  Apple has a philosophy of simply developing the best new products – even if this competes with older existing products.  This is where Apple is a little different from many other technology companies.  You certainly cannot argue with their revenue figures.

 

Apple – Epilogue

 

While Apple's future may be in doubt beyond 2011 due to human and competitive forces, Apple is going to be a fantastic investment for 2011.  Mark Elliot Investments will let you know when Apple becomes either too expensive or is no longer responding appropriately to competition.  Before concluding, I need to make you aware of a clever trap that Bears shall lay for Apple investors.

 

Investors will need to keep the faith on Apple during the second and third quarters of 2011 and continue holding on to Apple shares.  This is when Apple characteristically dips in revenue because there are no holiday sales drivers.  The Bears will make a lot out of this drop in revenue.  Just like they did in 2010.  The Bears attributed, incorrectly, that the 2010-second quarter fall off in profits was all due to Apple "cannibalizing" their own iPod sales.  This bearish argument even prevailed in the third-quarter, when the third-quarter was very high for a third-quarter.  Finally, the bears will attribute the fall off in revenue to Apple falling to pieces without Steve Jobs.  Do not worry about the revenue slumps.  The second and third quarters slumps for Apple are seasonally in nature.

 

It is important to look at Apple's revenue over a period of years and not to be preoccupied with quarter-by-quarter increases or drops.  When you look at Apple as a long-term investment they are incredibly noteworthy.  When Apple shares dip, put some of your cash to work and buy more Apple shares.  Rotate out of other companies that have high PE ratios and sew this money into the lower valued Apple shares.

 

Apple is this decades Intel and Microsoft.  Remember, in the 90s, how people used to tell you Intel and Microsoft is just too expensive.  There are just too many people following the same stock.  Meanwhile, year after year, you missed the opportunity for being wealthy.  Please, do not let this tired wisdom or the "fear of tech bubbles past" fool you.  See Apple for their investment fundamentals.  They are a fantastic investment opportunity – even now.

 

As always, I wish you the best of luck with your investments!

 

"Procrastination is the art of keeping up with yesterday.

Chasing the American Dream does not count as exercise.

The only thing you ever get free of charge is a dead battery.

Humpty Dumpy had a great fall – had a pretty good spring and summer too." – from the "Mammoth Book of Best New Jokes", edited by Geoff Tibballs

 

About the Author

I am an experienced and successful investor of many years and the owner/operator of www.MarkElliotInvestments.com.  I want to help you to become a better investor too.  Visit Mark Elliot Investments for more interesting investment advice and help.

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