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What to expect: Apple Q4 2008 earnings preview

post #1 of 13
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Wall Street investors are holding their breath as Apple is set to report earnings after the close of regular trading this afternoon. This particular report will be one of the most crucial in the companys history as Wall Street and her analysts have completely written Apple off as a business that could thrive in a slower economic environment.

In order for Apples shares to recover from its recent 50% plunge in value, Apple will have to demonstrate its resilience in this slowing economy by both reporting strong earnings results and offering some compelling guidance.

In the past, Apple has consistently offered the street ultra conservative guidance, basically rendering such guidance useless when it comes to how the company will actually perform. Yet, irrational investors on Wall Street continue to be completely preoccupied with Apples meaningless guidance making it extremely difficult for Apple to rebound until management gets a clue that its conservative nonsense is not working in this particular environment. Apple should either take a page from Googles book and not offer guidance at all, or offer guidance that is more realistic in this skittish environment.

Analysts polled by Thomson Financial expect Apple to post earnings of $1.11 in EPS on $8.05 billion in revenue fueled by sales of 2.7 million Macs, 10.5 million iPods and about 4 million iPhones. For Q1 2009, analysts are generally looking for Apple to report $1.66 in EPS on $10.6 billion in revenue.

I am looking for Apple to record approximately $1.25 in EPS on $8.343 billion in revenue. I expect Apple to sell 2.9 million Macs, 11 million iPods and about 7.25 million iPhones. I expect Apple to report that it reached its 10 millionth iPhone sales goal a full three months ahead of schedule. I also expect gross margins to drop sequentially to 33.5%, operating expenses to rise to $1.310 billion, and OI&E to rise to $122 million. I'm modeling Apple to post net income of about $1.33 billion after taxes of $474 million.

In terms of the revenue breakdown from Apples primary operations, I am looking for Apple to produce $4.118 billion in revenue from Mac sales (2.9 million Macs at $1,420.00 ASP), $1.595 billion in iPod revenue (11 million iPods at $145 ASP), and a total of about $2.63 billion derived from its other primary operations (this includes revenue Apple recognizes through its other music related products and services, iPhone and related products & services, peripherals & other hardware, and software, service and other sales). The table below lists my estimates along with two other analysts whose opinions I highly respect.





My Estimates Compared to Wall Street Analysts

The table below compares my estimates with Wall Street analysts. It should be noted that Kathryn Huberty from Morgan Stanley consistently provides earnings estimates which prove to be some of the worst on Wall Street. I fully expect the trend to continue when Apple reports earnings this afternoon.



My Past Performance compared to Wall Street Analysts for Q2 2008

The table below compares my past performance with Wall Street analysts. The numbers highlighted in blue designate the closest estimate to Apples actual report whereas the numbers highlighted in red designate the estimate which was furthest from Apples actual report.



Notice how Kathryn Huberty of Morgan Stanley made the worst call in four out of the six major areas of prediction. She actually missed revenue by almost a cool billion ($815 million). I pointed out the obvious flaws in her analysis before and after earnings were released in Q2 2008. I also tried to point out that investors ought to ignore Kathryn Hubertys estimates and her meaningless downgrades of the stock. In September, she downgraded Apple two weeks in a row causing the stock to drop a cumulative 30 points or about 30% between the two downgrades.

Disclosure: Long Apple. The information contained in this blog is not to be taken as either an investment or trading recommendation, and serious traders or investors should consult with their own professional financial advisors before acting on any thoughts expressed in this publication.
post #2 of 13
It won't matter what Apple reports. The media will jump on the slowing world economy and say Apple can't compete with their high-end, boutique products in the coming/current depression/recession.

- Jasen.
post #3 of 13
I agree that to large extent, what Apple report doesn't matter at all. What matters to investor is the guidance. It's sad truth but it's just like that.
post #4 of 13
The last weeks have shown how much the capital markets are driven by euphoria/hysteria: 100%. Apple's numbers don't really matter. It's successful business, which everyone can see, is what should make you buy APPL shares... and stick to them.

*only one thing: you forgot to "red" your own EPS estimate...
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post #5 of 13
Quote:
Originally Posted by hugodinho View Post

*only one thing: you forgot to "red" your own EPS estimate...

ouch, that's embarrassing, isn't it!

still, very interesting analysis, and kudos to AI for getting it. Of course, Zaky's estimates are higher than the others', heightening the chances of reality falling short of expectations. It's a bind for everyone: paid or unpaid, the analysts have to release their estimates prior to announcements, or they can't hope to win bragging rights (more politely, let's call it earned credibility).
post #6 of 13
Quote:
Originally Posted by AppleInsider View Post

as Wall Street and her analysts have completely written Apple off as a business that could thrive in a slower economic environment.

Wall Street Analysts today are dumbed down morons who don't understand anything let alone Apple.

They are the geniuses that couldn't see the empty economy of paper cards collapse coming. These ignoramuses can't even understand how Apple is the Sony of this millennium and century - because they don't have a clue what an oracle Sony was last century - it was before their time - and ignorance rules today... Nothing matters if it's not spread open in front of their eyes and pea brains - even then they are so absorbed in their self promotion that they miss every obvious point. History....

The most amazing thing to me is how these analysts even get the attention and trust of any investor, anymore... Are people that stupid and ignorant, that they hold any value in these narrow minded and absolutely faulty mindless assessments ????!
post #7 of 13
Another vote on the "it doesn't matter" front, unfortunately. Abramsky is saying his bear-case price target is $75 (bull case $140). Apple will likely guide towards $1.55-1.60 EPS which is a 10% contraction year over year. Tech stocks are valued largely on growth rates, so there is likely to be significant PE erosion with that kind of guidance.

Of course, if they guide to an EPS of $1.76 (flat year over year) for Q1, they should immediately jump up to $125.

(And yes, I am very long on AAPL.)
post #8 of 13
I think everyone realizes these analysts are brainless. The problem is the financial press feels the need to report what these morons have to say and thus investor or forced to act on these reports for fear that everyone else is going to. Without the press reporting what they say, nobody what give a crap.

As far as apple, most of these guys, except Gene Munster, completely fail to recognize how powerful a brand it has become, especially to the younger generartions. Why do teenages spend 250 dollars on a pair of jeans. Not because of the fabric the jeans are made of. Because of the brand. This has become true of apple which is why people are willing to spend a few extra hundred dollars for a Mac (not to mention they are clearly superior machines, but that is secondary to the "coolness" factor). All one of these morons would have to do is walk onto any college campus or any coffee shop in Manhattan and see for themselves.

Currently, wall street values apple at approximately 62 billion (Market cap-cash in the bank). This is unbelievably cheap. They are world's biggest MP3 maker, the world's biggest music retailer, soon to become one of the biggest PC makers, not to mention the iPHONE and app store which nobody is talking about. You will look back on these prices in 3-4 years and kick yourselves you didn't margin up your whole account and go long on this company.
post #9 of 13
All I know is when I dropped by the Apple store (Vancouver, Canada) for 5 mins on Saturday it was packed...and I saw another three new Macs leaving...2 Macbook Pros (new ones) and 1 large iMac! And that was really only 5 mins I was there...

Similarly (at around the same time) my parents also saw an iMac leave another good Mac retailer - London Drugs across town...

So Macs are still selling very well - at least in Canada...
post #10 of 13
I think we should keep a very close eye on Ms Huberty. If she repeats her shoddy performance as "the worst of the worst" again I think somebody should look her up, escort her someplace very private, and give her a lesson in math she never recovers from!
post #11 of 13
I definitely think there will be a large amount of earning this quarter.

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post #12 of 13
Leave Katie alone!11!
post #13 of 13
Quote:
Originally Posted by AppleInsider View Post

...
My Past Performance compared to Wall Street Analysts for Q2 2008
...
whereas the numbers highlighted in red designate the estimate which was furthest from Apples actual report.
...

Except yours, which you conveniently forgot to highlight in red as the worst EPS estimate of the lot. Given that your other numbers were good, one can see it was because of a gross margin estimate that was "way out there".

I enjoy reading your "highly optimistic" articles, but I have a hard time believing it was merely coincidental that you didn't call out your own EPS as the worst estimate. Come on, be transparent, it's 2008.
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