Why I'm Bullish on Apple

Over the past several weeks I've focused much of my analysis work on the performance elements that underpin Apple's extraordinary rates of revenue and earnings growth. Meanwhile, Apple's share price (AAPL) has been trapped in a comparatively narrow and underwhelming trading range since the all-time high of $364.90 was set in intraday activity on February 16th of this year.  

There's much speculation why Apple is currently trading, even after today's strong advance, almost 5% off the all time high at Tuesday's closing price of $347.83 per share. From index rebalancing to hedge fund ploys, most active AAPL traders have their own views as to the factors impacting the share price. But none of these factors in any way impact the company's fundamental strengths nor limit the long-term potential of the share price. I consider AAPL's current trading price to represent a short-term dip below an established trading range prior to a strong, bullish advance. 

The Factors Supporting AAPL Share Price Appreciation

Rising Revenue, Rising Earnings Per Share: Apple remains in an era of extraordinary revenue and earnings growth. During the first six months of FY 2011 Apple's revenue and earnings growth rates have accelerated due to the popularity of the Apple iPad and the continuing success of the Apple iPhone. In the first six months of FY 2011 Apple's revenue rose 76.2% and eps moved higher by 83.2%. Constraints on iPad 2 supplies in the March quarter limited the revenue and earnings growth rate from moving even higher. 

For FY2011 (ending in late September) I forecast Apple's revenue will reach or exceed $112 billion and eps will reach at least $27.50 per share. Based on my forecasts Apple is currently trading at a multiple of only 12.65 times the current fiscal year eps estimate. The revenue growth chart, including my FY 2011 revenue estimate, illustrates the pace of Apple's revenue growth over a six-year period. Over 60% of Apple's revenue in FY 2011 will be sourced from products that did not exist in the marketplace as recently as four years ago today. The markets for the Apple iPhone and especially the Apple iPad have yet to be fully realized and the markets for both products will continue to expand. 

Even more dramatic than the pace of revenue growth is the pace of growth in earnings per share. Form eps of $1.55 in FY 2005 to estimated eps of $27.50 in FY 2011.

Apple Share Creep And The Number Of Fully Diluted Shares

For the past five fiscal years Apple have been in an era of extraordinary revenue and earnings growth. In the December and March quarters of the current fiscal year the company's pace of revenue and earnings growth has accelerated even more. For the first six months of FY 2011 Apple's revenue has risen over 76% and the rate of earnings per share (eps) growth topped 83%. However, the rate of net income growth is higher than the rate of eps growth.

Each quarter one of the small challenges confronting AAPL analysts is translating net income into earnings per share. The reason why it's a small challenge is because of what I'll call "share creep" and the gradual and continual increase in the number of fully diluted shares used in computing each quarter's earnings per share performance. For example, in the recent March quarter while net income rose about 94.8% to $5.987 billion from $3.074 billion in the same quarter one year before, the reported rise in eps in the fiscal quarter was about 92.2% to $6.40 from $3.33. The difference in the percentage gains was due to the 1.42% rise in the number of fully diluted shares over the 12-month period to 935.944 million shares at the end of the March period in FY 2011from the 922.878 million shares at the end of the March period in FY 2010. 

While "share creep" in sequential quarters might appear to be slight, when measured over a 12-month period of time the increase in fully diluted shares becomes material to the eps outcome. During the 10-quarter period illustrated in the graph and data table below the number of fully diluted shares used in quarterly eps calculations has risen about 3.8%.

	Quarter	Shares	Quarterly Gain	YOY  Gain	Quarterly %	YOY %
	FQ1 ’09	901,494,000	-3,292,000	1,440,000	-0.364%	0.160%
	FQ2 ’09	902,993,000	1,499,000	3,664,000	0.166%	0.407%
	FQ3 ’09	909,160,000	6,167,000	5,993,000	0.683%	0.664%
	FQ4 ’09	914,374,000	5,214,000	9,588,000	0.573%	1.060%
	FQ1 '10	919,783,000	5,409,000	18,289,000	0.592%	2.029%
	FQ2 ’10	922,878,000	3,095,000	19,885,000	0.336%	2.202%
	FQ3 ’10	927,361,000	4,483,000	18,201,000	0.486%	2.002%
	FQ4 ’10	928,825,000	1,464,000	14,451,000	0.158%	1.580%
	FQ1 ’11	933,154,000	4,329,000	13,371,000	0.466%	1.454%
	FQ2 ’11	935,944,000	2,790,000	13,066,000	0.299%	1.416%

I'm posting this history of the fully diluted share count over the most recent 10-quarter period and the accompanying graph as a benefit to other AAPL independent analysts as we enter the latter half of the June quarter and complete our June quarter revenue, net income and eps estimates.

Posts At Eventide Resource Guide

The objective of the Posts At Eventide Web presence is to benefit readers seeking to understand Apple's financial performance and to serve as a repository of information and analysis for other independent AAPL analysts preparing quarterly estimates and share price forecasts. Please see the Posts At Eventide Resource Guide for more information. 

Robert Paul Leitao

Apple: 10-Quarter Review of Expenses Per Revenue Dollar

It's no secret Apple is in an era of extraordinary revenue and earnings growth. This is due to the company's ability to establish leadership in new and emerging product markets. In Apple's March quarter over 60% of reported revenue was sourced from products that did not exist in the market four years prior. 

On December 5, 2010 I published a post titled Apple's Startling Rates of Growth: A Five-Year Overview. Since that publication date and in the first two quarter's of FY 2011 Apple's pace of revenue and earnings growth has quickened. For the first six months of FY 2011 (the December and March quarters), Apple's revenue has risen over 76% and the rate of eps growth topped 83%. 

While it's common knowledge Apple continues to grow revenue and earnings at a frenetic pace, the company's expense ratios relative to revenue in this era of extraordinary growth have also become dynamic.

10-Quarter Review of Expenses Per Revenue Dollar

On May 14th in a post titled Apple: 10-Quarter Review of Revenue vs. Operating Expenses I compared the rate of Apple's revenue growth to the rate of growth in operating expenses. Today I'm following up that post with a review of Apple's expenses per revenue dollar. 

	Quarter	Cost of Sales	OpEx	Taxes	Total
	FQ1 ’09	0.621	0.118	0.085	0.824
	FQ2 ’09	0.601	0.144	0.084	0.828
	FQ3 ’09	0.591	0.139	0.089	0.819
	FQ4 ’09	0.582	0.116	0.098	0.796
	FQ1 ’10	0.591	0.108	0.088	0.787
	FQ2 ’10	0.583	0.122	0.071	0.776
	FQ3 ’10	0.609	0.121	0.066	0.796
	FQ4 ’10	0.631	0.102	0.057	0.789
	FQ1 ’11	0.615	0.092	0.073	0.781
	FQ2 ’11	0.586	0.095	0.078	0.758

Apple: 10-Quarter Review of Revenue vs. Operating Expenses

One of the less heralded trends in Apple continuing revenue and earnings per share growth story is the recent and dramatic drop in operating expenses relative to revenue. 

On December 21, 2010 I published a blog post titled Apple: Revenue Growth vs. Growth in Operating Expenses. Today I'm updating the data to include the first quarters of fiscal year 2011. What the numbers indicate is over the most recent three-quarter period revenue consumed by operating expenses (Research and Development and General, Selling and Administrative expenses) has dropped dramatically, contributing to a rate of growth in eps exceeding the rate of growth in revenue. I will provide a fresh analysis of Apple's rate of eps growth in an upcoming post at Posts At Eventide. 

			YOY Rev.	Operating	YOY OpEx	OpEx %
	Quarter	Revenue	Growth	Expenses	Growth	of Revenue
	FQ1 ’09	11,880		1,406		11.80%
	FQ2 ’09	9,084		1,304		14.40%
	FQ3 ’09	9,734		1,351		13.90%
	FQ4 ’09	12,207		1,421		11.60%
	FQ1 ’10	15,683	32.0%	1,686	19.9%	10.80%
	FQ2 ’10	13,499	48.6%	1,646	26.2%	12.20%
	FQ3 ’10	15,700	61.3%	1,902	40.8%	12.10%
	FQ4 ’10	20,342	66.6%	2,065	45.3%	10.20%
	FQ1 ’11	26,741	70.5%	2,471	46.6%	9.24%
	FQ2 ’11	24,667	82.7%	2,344	42.4%	9.50%

Apple: Ten Quarters of Product Unit Sales

The objective of the Posts At Eventide web presence is to benefit readers seeking to understand Apple's financial performance and to serve as a repository of information and analysis for other independent AAPL analysts preparing quarterly estimates and share price forecasts. 

This is one of a series of posts designed to provide data and historical context for the development of quarterly unit sales estimates for Apple's major hardware device product lines.  This post details the unit sales for the Apple iPhone, iPod and Macintosh personal computers over the most recent ten fiscal quarters and iPad unit sales for the four fiscal quarters since the product has been in commercial release. 

The Apple iPhone

There's no disputing the fact the iPhone is Apple's biggest revenue product. In the recent March quarter the sales of iPhones and related products and services generated almost 50% of Apple's $24.667 billion in reported revenue. Led by a 155% increase in domestic unit sales, the popular smartphone performed better than most analysts expects with a 113% increase in global unit shipments to 18.647 million. 

While there is seasonality in the iPhone's unit sales performance, the outcome is more often determined by product supply rather than seasonal variations in demand. Apple's inability to produce sufficient quantities of iPhones to meet global demand following the product's annual refresh cycle has hampered unit sales in the third and fourth fiscal quarters of the year.  

The chart below illustrates the consistent unit sales growth of the Apple iPhone with the June quarter (June quarter) of FY 2010 the obvious exception due to the unique issues surrounding the illicit publication of iPhone 4 photos prior to the product's release. Apple pulled back on shipments of the iPhone 3GS ahead of the iPhone 4's commercial debut. 

		Unit Sales	iPhone	Sequential	YOY
		FQ1 ’09	4,363	-36.69%	88.47%
		FQ2 ’09	3,793	-13.06%	122.72%
		FQ3 ’09	5,208	37.31%	626.36%
		FQ4 ’09	7,367	41.46%	6.89%
		FQ1 ’10	8,737	18.60%	100.25%
		FQ2 '10	8,752	0.17%	130.74%
		FQ3 ’10	8,398	-4.04%	61.25%
		FQ4 '10	14,102	67.92%	91.42%
		FQ1 ’11	16,235	15.13%	85.82%
		FQ2 '11	18,647	14.86%	113.06%