Tuesday, January 15, 2013

Fiscal 1Q 2013 Final Estimates

As of Tuesday's closing price of $485.92, AAPL is trading at 8.3x my forward EPS estimate (5.9x ex-cash). This extremely low forward valuation is similar to that of mid 2011, when it traded in the mid $300s ahead of $44 EPS for FY2012 and mid $80s in cash per share at the time. The stock ended up doubling a year later. Interestingly, my (lowered) target now implies a doubling of the current price over the next 12-18 months.

Detailed estimates:

3mo ending Dec-2012   Rev($M)   EPS($)
-------------------   -------   ------
Apple guidance         52,000    11.75
Analysts consensus     54,580    13.34
Deagol estimates       58,601    15.20

3mo ending Mar-2013   Rev($M)   EPS($)
-------------------   -------   ------
Deagol estimates       49,452    12.89
Analysts consensus     46,890    12.10
Apple guide (est.)     44,000     9.75

12m ending Sep-2013   Rev($M)   EPS($)
-------------------   -------   ------
Deagol estimates      208,728    54.34
Analysts consensus    191,260    48.67

Valuation (12mo ending on)   EPS($)  Y/Y  10x  Cash  Div   Tot
--------------------------   ------  ---  ---  ----  ---  ----
Trailing        (Dec-2012)    45.49  30%  455   140    5   600
Fair value      (Dec-2013)    58.35  28%  584   182   11   777
1yr target      (Dec-2014)    73.35  26%  733   238   14   985

F1Q13 Revenue breakdown ($M):
Mac        6,884 ( 5,178 × $1,329)
iPod       2,282 (14,000 × $163)
iPhone    33,758 (53,000 × $637)
iPad      11,346 (25,000 × $454)
iTunes     2,525
Periph       865
Software     941

Income statement ($M):
Revenue   58,601
COGS      35,467
GM        23,134
OpEx       4,101
OpInc     19,033
OI&E         377
Pre-tax   19,409
Tax        4,998
NetInc    14,411
Shrs.        948
EPS       $15.20

GM%        39.5%
OpInc%     32.5%
Tax%       25.8%
NetInc%    24.6%


Anonymous said...

Thats a Blowout!

Ovi said...

I like those numbers. You should join us at Braeburn Group.


Michel C said...

Care to share a little more on the thinking those numbers ? Specially iphone

Daniel Tello said...

Michel, 53m just seems right to me considering all the metrics I track (various kinds of market shares, growth, new users, replacements, etc). BTW that includes about 3-3.5m for channel fill.

RussianDoc said...

lol Ovi please dont give him the idea to join the braeburn group, you guys are permabulls, mr. tello on the other side is objective (as objective as one can be being long aapl at least).
just ask zaky to join you, thanks :-D

Anonymous said...

when are outstanding shares calculated? seems to be 940 now which would give a .10-.15 cent boost on eps but this assumes they are calculate now or close to end of quarter.

Anonymous said...

Appreciate the work you do on this blog. Can you comment on any specific adjustments you might have made in reaction to the news/rumors about iphone component orders being cut by 50% or so? Also, do you give any negative weight to your march sales numbers given expected announcements of next product cycles ie iphone 5s and ipad 5? Thanks.

Anonymous said...

As someone who works as a telco, the assumptions look solid. Mdp.

Anonymous said...

Reiterating a previous comment. What are your opinions on the press about component cutbacks. Does that play into your assumptions into march and June quarters at all?

Daniel Tello said...

I saw 939m issued and outstanding shares as of Dec 17, 2012. However, the EPS figure, and diluted EPS are calculated using the average shares issued and outstanding over the period, and then diluted by yet unissued shares such as outstanding options, employee stock plan shares, and unvested RSUs. Check out the latest 10K p50-51.

I didn't make any adjustments based on reports of a 50% reduction in iPhone component orders, simply because the supposed 65m units original order for Q2 made no sense at all. In any case, around 33m iPhones 5 fits within my total for March. I do account for slightly stronger seasonality than previous years, as the slowing growth rate reveals more of the normal seasonal decline after the Holiday period. I'll share the specifics behind my march estimates and revise them if needed in three months.

Anonymous said...

Have followed you a long time deagol on even before apple sanity. Thanks for posting your work. If I may ask, what is apples book value. I believe we are trading at just 2 x's book. Your thoughts.

Walt French said...

Today's multiples are just INSANE -- you don't expect any expansion (un-compression) ?

Daniel Tello said...

Book value as of Sep is about $126 per share, so it's trading around 4x book.

Walt, as described in the post current forward multiple ex-cash is below 6x. My fair value/targets are derived from 10x plus cash. That's quite an expansion.

Anonymous said...

Hi Daniel,

I've been following your aapl model for a few years now, and you've been pretty much on the money most of the time. However, the last couple of quarters, I noticed your estimates were well over Apple's actual results. What was the reason for the discrepancies, and did you qualify somehow the latest results by the error margin from previous estimates?


Daniel Tello said...

I appreciate the question nr, as I take reliability and accountability and such things very seriously. I'll try to answer as best I can but as I'm sure you understand much of forecasting is subjective/intuitive and very hard to pin down where or why something went awry. Apologies if this gets long.

In the past I used to make a detailed comparison after each report drilling into the errors for each line item. After a couple of years that became a little dry and boring, in my opinion, so I stopped doing it I think back in 2011. I thought any reader who was really interested in it could go to the estimates, actuals in hand, and do their own comparisons on whatever line items they thought most relevant.

So feel free to do that for any of my published estimates which always have an official comparable figure reported by Apple. Here I'll just comment broadly on the forecasting challenges leading up to the June and September "misses".

The letdown on both quarters can be expressed (mainly) in two words: iPhone transition. First affecting sales (June), and then affecting margins (Sep).

We all knew there was a big transition coming, and although there was speculation about the timing I never bought the June/July launch theories. But once WWDC came and went with the iOS 6 announced for the fall, the Sep/Oct timeframe for iPhone 5 loomed ominously. The problem then became gauging the impact from potential buyers holding back until the launch, and the impact of the launch itself.

We already had some experience about this from the Sep 2011 miss due to the 4S transition, the first miss in many years for Apple. Sales had been rising sequentially and relentlessly since the 3G-3GS transition in 2009, with only a 2-quarter plateau (flat sequential units) in early 2010 (with the June quarter holding steady volumes in the midst of the infamous Gizmodo leak). Then the 4 launched and sales exploded (8m to 14m q/q), and kept increasing by +2m sequentially right up to June 2011, again in the midst of rampant speculation about a new iPhone (then it was rumored to be iPhone 5). So June sales increased even more q/q than in previous transitions.

So by mid 2011 the general impression among most analysts was that although many of us Apple followers and pundits knew about and prepared for every upcoming launch, it seemed that customers weren't too concerned about this annual pattern in the iPhone product cycle. They just kept buying iPhones in droves, regardless of an imminent upgrade. Well, this changed in Sep 2011 for the first time. I had estimated 22m, up sequentially from 20m (+2m as the then recent pattern suggested), indies consensus was 23m and pros were at 20m. Apple reported 17m sold.

Thus became the first miss in ages. Avery pro did better than me, and I ranked 41st out of 53 (although 4th among indies). But for Apple (and AAPL) the depth of the shortfall wasn't really that bad: just a 12% q/q decline in sell-through. And Apple gave an astonishing guidance that turned that into the "best miss ever" for the stock (I considered titling a post-mortem piece just like that). Then they followed through by blowing past every single analyst's raised estimate, even them "crazier" indies, in Q1 2012 (37m actual vs. indies at 33m and pros at 30m).

Despite the generalized feeling that the iPhone rocket was right back on its outer space trajectory, I did sense that this sequential miss/blowout over the Sep/Dec transition was a newly developing pattern. For Q2 (last March) I nailed it (iPhones and EPS) with a relatively conservative estimate of 35m (indie consensus sequentially flat at 37m same as Asymco all preserving the flat historically valid seasonal pattern). It was the first sequential Q1 to Q2 decline (although slight) since 2008 and I was fortunate to bake in some intuition about that newly developing seasonality/product-cycle/customer-awareness pattern vaguely suggested since Sep 2011.

(continues in next comment...)

Daniel Tello said...

(continued from last comment...)

So again a very slight sequential decline (5%) but now pushed ahead (earlier) a couple of quarters, right after a stall/blowout on the previous two reports. What would Q3 be like, with once again rampant speculation of a believe-it-this-time-is-for-real "truly new" iPhone 5 now coming in June/July (which I readily dismissed but many customers most likely did heed in contrast with prior years)? Well, I tried to hold steady and bake in some more "seasonality" with a further ~12% sequential decline just like the prior Sep but now a quarter earlier. To my surprise my 31m came up just a bit higher than the indie consensus at 30m, which was in turn a tad higher than the "silly" pros consensus at 29m. Apple reported 26m. Can't say I was alone in that miscalculation, as we all got it wrong.

But yes, it was quite bad. I had revs $5b (16%) higher and EPS was almost $3 (30%) off. Only one single "silly" pro did worse than me, and even though I did better than 2 dozen indies, I ranked 44th out of 68. That's not decent, not even average performance. On top of the iPhone problem, my Mac model was again quite high and the complex, self-reinforcing "halo" formulas boosting Macs ahead of the PC industry weren't working anymore. Coming 20% too high in iPhone and Mac units, 10% too high on iPad units, 4%/5% too high on iPad/Mac ASPs, and 270bps of GM excess in my estimate all shows that it wasn't just my iPhone estimate. And yet it was, as usual, the biggest contributor to my revenue and EPS discrepancies.

And so for Sep, I hunkered over every column and cell in my the spreadsheet, questioning and revising every assumption, doubting every trend, and restraining every projection, weighing both the y/y and the q/q declining growth trends, fine-tuning the customer adoption models to allow for temporary "transitional" pauses, and trying to guess how much of a pause it made sense for this now more prolonged transition. I finally settled on 28m iPhones. Apple reported 27m. Nailed the Mac units. Fortunately there was a nice upside to my Mac ASP which allowed me to really nail the revenue: off by less than 100m (0.3%).

But then the GM% tripped me up. Overestimated by 350 bps, it killed my EPS estimate (off by a buck or nearly 12%). There are many little details that contributed to this margin shortfall (you can hear a litany of minor reasons on the cc and I agree partially on all of them) but imo identifying a clear-cut culprit remains quite elusive. Something similarly vague and uncertain may be going on regarding margins going forward. For now I’m letting them hover around 40%, and this may prove very conservative in the short term, although longer term (beyond 2-3 years) might be a bit optimistic.

Combining the two misses, $5b off in revs and $4 off in EPS, over a base of $71b and $18 respectively for the six months combined, doesn't seem too catastrophic (7% and 22% respectively). I've seen pros go consistently off (under) by way more, and keep it going over much longer periods. A few indies too (aiming higher). But where the real impact to my model really gets felt is in the projections into the future. In July before that report I was modeling $240b/$73 in revs/EPS for FY2013, now I'm at $209b/$54. That's a 15%/35% overshoot on yearly estimates (hopefully this coming report will not add to that error) and yearly now does begin to signify the fundamental basis for the stock price. Curiously, the correction in AAPL was ~30%.

(continues in next comment...)

Daniel Tello said...

(continued from last comment...)

And yet, despite my "radical" revision in future revs and EPS, and the market nearly aligned with it in its knee-jerk correction over the last 4 months, I would still find AAPL undervalued (moderately i.e. by 10%) if it traded at $700 today. And my target would still imply a 40% return within 12-18 months. Yes, from the ATH around $700 and in spite of the 30% EPS revision. And the reason for that is that as 2013 gets more moderate, the healthy growth still expected for 2014 becomes much more achievable, and the slowdown profile less abrupt, prolonging and stretching the adoption waves further into the future, and pushing saturation further away. All of it giving me now more confidence than ever that Apple will at least double once again within the next year or 2, and grow another 50% beyond that over the following 2 years.

Hope this helped clarify your concerns about the recent challenges in almost everyone's forecasting efforts, and sorry for the length.

Anonymous said...

Daniel, very insightful explanation to that last question. Rare for anybody to share their thoughts in such detail.

One thing I am curious about is how you may have reflected Samsung's "surge" in sales and if/when there would be a signal to you that there has been some sort of shift in product perception.

This is a great blog Daniel, I wish the sell-side analysts spewing their numbers were this detailed in their reasoning.

nrabinov said...

Thanks, Daniel. Your answer was as interesting as it was detailed!

Indeed, I agree with you that in order to accurately predict Apple's results, one must accurately peg iPhone numbers.

It's a little scary how dominant this product has become in Apple's portfolio, which begs the question about the rumors that have been circulating recently about a "cheap" iPhone. Personally, I can't imagine why Apple would threaten the iPhone brand in this way, just for a few more market share points. Apple has never cared about market share, and I am finding it difficult to understand why they would begin to now.

I would appreciate your take on this issue.


Arthur Chan said...

Hey Daniel,

Your comment on how you tweak the model should be a post itself. Thanks for preparing the numbers.


Anonymous said...

I recall you were using 2 year replacement cycles for both iPhone and iPad. Is that still the case?

Note in China subsidized contracts are over 3 years. Here in the US, I believe some carriers have extended it to 2.25 years

I think 2 years is too aggressive. I'm modeling 2.5 years for iPhone and 3 years for iPad. It gives me roughly a double of stock price over the next 5 years.

Also, there is a substantial secondary market for iOS devices. How does that fit into your modeling?

JavaJack said...

Thanks for all your work, Daniel. I think you know that your blog is a "must read" for me and I really hate the 3 months of no commentary that takes place between each of your estimates. Your Q1 estimates have generated more activity, commentary by readers than almost any post you've made in years. I found your thoughts within the comment area to be very interesting and always have an appetite for more. Thanks for all your work over the years.

aaarrrgggh said...

Great analysis as always, thanks for the effort.

Daniel Tello said...

[link removed] Stock Market Mate said...

Thanks for sharing. Anxiously awaiting the earnings report.

Anonymous said...

You really blew this one Deagol :)

Daniel Tello said...

Sure, although I've done 3 times worse than 10% off. Some others are off even more, this time too.