Apple's share price revisited

Sunday, 25 April 2010 19:47

A good friend, and an Apple employee, raised a valid point about one of my recent blogs (http://www.seedcatalyst.com/joomla/valuations/stock-price-correlations-with-reality) on Apple’s share price response to their quarter results:

‘Big deal about selling more iPhones than last quarter is that holiday quarter normally has 1.5 times the sales of any other quarter. Also traditionally, 2nd quarter has no product launches to boost sales and sales are expected to be sluggish as consumers wait for imminent product refreshes in summer.
If you look at seasonality of AAPL financials, you'll see this in order of best to worse.
Q1: holidays/Xmas
Q3: traditional iPhone product refresh cycle & back to school
Q4: traditional iPod and Mac product refresh cycles
Q2: for above reasons
Hence the reason for celebration.. Cheers!!’

So, the points he made were:

1. Apple did better than the last quarter which was the holiday quarter and hence the results are note-worthy

2. The second quarter is generally sluggish and hence the results are note-worthy

While this would typically be true, my questioning the share price was exactly because the data didn’t support these assertions.

On better results vis-a-vis the last quarter: net sales actually dropped 14% from the previous quarter. Net income was down 9%

Quarter on quarter growth

	2007			2008				2009				2010
	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1	Q2
Net sales	-26%	3%	25%	42%	-22%	-1%	73%	-8%	-24%	-8%	63%	15%	-14%
Cost of sales	-30%	0%	38%	34%	-20%	-3%	67%	-9%	-26%	-3%	42%	23%	-15%
Gross margin	-17%	8%	5%	60%	-26%	5%	84%	-6%	-20%	-17%	101%	6%	-12%
Total OPEX	-4%	11%	8%	17%	-4%	4%	7%	8%	-7%	4%	5%	19%	-2%
Operating income	-25%	6%	2%	101%	-38%	6%	151%	-11%	-25%	-28%	178%	2%	-16%
Net income	-23%	6%	10%	75%	-34%	3%	126%	-7%	-28%	-24%	155%	8%	-9%

On the second point, i.e the second quarter being the sluggish quarter, we are talking about a year when the 3GS has been launched and Apple has entered several new Asian markets. The positive news, I think, should have been expected. Moreover, we had similar results when they launched the iPhone in the US in 2007. A cut of the data I’ve been using as reference:

Y-o-Y Quarter growth

	2008				2009				2010
	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1	Q2
Net sales	35%	43%	38%	90%	24%	21%	12%	5%	32%	49%
Cost of sales	28%	48%	42%	73%	17%	8%	9%	-7%	26%	44%
Gross margin	50%	34%	30%	129%	35%	47%	16%	27%	42%	55%
Total OPEX	34%	34%	27%	26%	17%	13%	12%	10%	20%	26%
Operating income	61%	33%	34%	230%	46%	77%	20%	33%	52%	71%
Net income	57%	36%	31%	168%	43%	55%	15%	29%	50%	90%

In fact a few analysts have actually commented that Apple seems to underball their figures and then over-deliver for greater impact.

Before, it seems like I am not giving due respect to the master of the day, let me reiterate that as per me the 90% growth in net income is by no means a small feat!!

This is further amplified looking at the performance of their competitors. For example Nokia’s results show their quarter on quarter revenue growth is a mere 3% with gross margin growing at 6%. Removing the impact of NSN – the devices and services division still grew only by 8% - no comparison whatsoever. Yes, I know they have a far greater denominator but still come on.....

Note: Apple's financial year is October to September i.e. Q1 is October to December

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