On Friday, September 21, 2012, the day that the iPhone 5 became available Apple’s shares hit an intra-day high of $705.07 or $100.72 post split. There is a bit of eerie similarity with Friday’s intra-day high of $102.35 and close of $100.96 (the day that the iPhone 6 and 6 Plus became available) and when compared to the company’s all-time intra-day high of $103.74 set on September 2 this year and the all-time closing high of $103.30 set the same day.
What is similar between the two years?
EPS is almost the same between the two years. Fiscal 2012’s EPS was $6.31 post-split and the Street’s average estimate for fiscal 2014 is $6.33. This also means that with the share price essentially the same that its 15.9x PE multiple (on trailing EPS) is equivalent.
There is a fair amount of similarity between the two timeframes revenue. In June 2012 Apple generated $35 billion in revenue and the Street was expecting about $36 billion for the September 2012 quarter (an increase of $1 billion or 3% quarter over quarter), which is what Apple generated. For the June 2014 quarter Apple generated $37.4 billion in revenue and the Street is expecting $39.5 billion in revenue for the September quarter, a $2.1 billion or 6% increase quarter over quarter.
Source: StockCharts.com (Note that StockCharts.com adjusts prior stock prices as dividends are paid)
What is different between the two years?
Gross margin is probably one of the biggest differences between the two years. In 2012 Apple’s March quarter gross margin hit an all-time high of 47.4%, dropped to 42.8% in the June quarter and guidance was for 38.5% (actuals came in at 40.0%). The decline in gross margins to 36.9% in the June 2013 quarter was probably the largest reason for Apple’s shares to drop to a closing low of $390.53 ($55.79 post-split) on April 19.
Since then Apple’s gross margin has not just stabilized but increased from the 36.9% low in the June 2013 quarter to 39.4% in the June 2014 quarter. Guidance for the September quarter is between 37%-38% but Apple has beaten the high-end of its gross margin guidance by 1.3% and 1.4% the past two quarters, respectively. It is also worthwhile to note that when warranty accruals are removed from the reported gross margins that for seven of the past eight quarters gross margins have been relatively stable between 40.7% and 42.0%.
The diluted share count as of the June 2012 quarter was 6.63 billion (947 million pre-split), which has shrunk by 9% to 6.05 billion in the June 2104 quarter. What this means is that with a lower share count and flattish EPS that operating income is down. In fiscal 2012 Apple’s operating income was $55.2 billion and is expected to be about $52 billion in fiscal 2014 or down 6%.
What’s next?
It appears that the iPhone 6 and 6 Plus are huge hits with their first 24 hour pre-orders of over 4 million and lead-times that are 7-10 business days and 3-4 weeks on Apple’s US website, respectively, which could drive upside to December quarter expectations. If the new iPhones can take some market share, which I expect them to do, gross margins remain stable and China gets the iPhone 6 in the next month or two the stock could move higher through the end of the year.
The next key events will be December quarter results and guidance (those are given) but when and how well Apple’s Watch is received could be a key driver for the shares. I don’t think there are high financial expectations for the Watch so any upside by it would help the shares. It could also address the issue that the company has lost its innovation mojo.
Apple Pay is the other key September 9th announcement that will take quarters if not years to see its financial impact. Overall I believe it could be a strong generator of higher margin revenue and with the large number of key partners in this space Apple seems to have the best shot of pulling off a mobile wallet solution more than anyone else.
Overall there doesn’t seem to be a lot of downside to the shares given its 14x PE multiple on fiscal 2015 estimates, large amount of cash even though most of it is overseas, strong cash generation, new products (especially the iPhone 6) and willingness to buy back shares.
