Apple investors are scared. That's because many experts
believe the iPhone 5 was a dud and the stock will head lower
after management provides earnings.
I don't find this likely. In fact, the pathetic stock performance
following the latest product release was a fluke.
Apple typically does well following an iPhone release. As a
matter of fact, the shares have increased following the release
of every other iPhone except the iPhone 5. In fact, Apple more
than doubled in value after the original iPhone and iPhone 4 were
Aside from a difficult period (globally) during 2008, AAPL has
typically rallied for months following iPhone releases. Also, the
shares have yet to come down to anywhere near where they traded
at when the iPhone 3GS, iPhone 4 and iPhone 4S hit store shelves.
However, instead of rising after the iPhone 5 release, the shares
sank. In fact, Apple fell 30% at one point, eliminating $200
billion worth of shareholder value in the process.
The iPhone 5 may be a technological improvement over past
designs, but that hasn't helped the stock. This may change on
January 23 when Apple reports its earnings after the market
Many analysts have waited five months to hear the announcement
because this will be the first full quarter of iPhone 5 sales
data. Though the iPhone 5 launched September 21, Apple's fourth
quarter ended on September 30.
Apple can put investor's fears to rest with big earnings this
quarter. And I think they'll do it.
First, analyst expectations for iPhone 5 revenue are far too
pessimistic. They are too concerned that supply disruptions in
October impaired or eliminated unit sales.
However, those sales didn't go away; they were merely postponed.
Even though 2013 could be a tough year on iPhone sales, plenty of
people kept Apple products on their shopping lists in November
and December. And that's just what Apple is counting on.
The U.S. consumer continued to spend gobs of money this holiday
season. Industry tracker comScore reported that U.S. shoppers
dropped $42.3 billion during the year-end holiday season. That's
a 14% increase from last year. Think any of those billions went
toward an iPhone 5?
I'm betting that some of that hard-earned money did. Apple could
blow expectations away and report 52 million unit sales. At an
average selling price of $630 per device, that's $32.7 billion in
Second, analysts are also downplaying the pricing ability of
Apple. However, given such healthy consumer spending during the
holiday season, shoppers likely had no problem paying a premium
for Apple's top-of-the-line products.
Traditionally, Apple boasts a gross margin greater than 40%. Yet,
many analysts believe it will be closer to 39% this quarter.
Because Apple generates so much revenue, minor changes in the
margin can result in drastically different profit estimates. A 1%
difference could be worth as much as $550 million.
Apple has had its share of difficulties during the past four
months. However, those challenges are reflected in the current
analyst expectations. In fact, the analyst estimates are likely
to be too dreary. I'm expecting Apple to beat on revenues, margin
and EPS this quarter.
So I think analysts are low-balling revenue and high-balling cost
of sales. But I'm doing the reverse. I expect more than $45
billion in sales from the iPhone and iPad segments and total
sales could easily hit $57 billion. Since Apple has fairly
consistent selling, research and operating expenses, it's easy to
extrapolate net income from here.
With $57 billion in sales and a 40.5% margin, Apple would report
$23.1 billion gross profit. Their operating expenses are likely
to be just under $4 billion while taxes should be close to $5
billion. Net income would be $14.3 billion under these
circumstances. This would result in an EPS of $15.05, which is
13% above the average estimate. This positive data should boost
Apple's outlook and valuation, sending the shares higher.
Apple is one of our favorite stocks. In fact, we recently sent
Top Stock Insights
a detailed report about the bullish case for Apple ahead of its
earnings report due out January 23. More information about this
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