Apple's growing expenses signal blockbuster $56B+ holiday quarter

Posted:
in Future Apple Hardware edited January 2014
Increases in capital expenditures historically have a direct correlation to revenue at Apple, and a recent spike in spending suggests the company is set to deliver a record quarter of at least $56.4 billion in revenue this holiday season.

Excluding retail stores, Apple expects to spend $7.2 billion on capital expenditures in its 2012 fiscal year, which implies over $3 billion in capital outlay for the remainder of the company's fiscal year. Apple's spending spike means the company is poised to deliver a massive, record quarter later this year, said Katy Huberty, analyst with Morgan Stanley.

"Apple's revenue and capex ex-retail stores have been 97% correlated over the past seven years and the acceleration in capex growth signals a similar acceleration in revenue growth, in our view," Huberty wrote in a note to investors this week.

She believes Apple is in the process of purchasing tools and machinery for new production processes, as well as added capacity at its suppliers. This suggests the company is planning to ramp up production significantly for new products, such as an anticipated next-generation iPhone or smaller iPad.

Huberty's forecast currently calls for Apple's revenue to reach $56.4 billion in this year's holiday quarter. Based on historical trends, Apple needs to allocate only $1.8 billion of its implied $3 billion of capital expenses in the current quarter to reach that revenue estimate.

Morgan Stanley


Investments outside of new product production, such as Apple's ongoing data center expansions, are not likely to represent a majority of the company's capital expenditures, Huberty said. Therefore she believes the $3 billion in expenses planned by Apple in the current quarter suggests a likely upside to her forecast of $56.4 billion in revenue for the holiday 2012 quarter.

Apple's best-ever quarter came in the holiday shopping season of 2011, when the company earned $46.33 billion in quarterly revenue and $13.06 billion in net profit. With the presumed launch of the new iPhone this fall, along with other potential products, Apple is poised to easily exceed its previous record.

Huberty is the second analyst this week to pick up on Apple's growing expenses. Maynard Um with Wells Fargo Securities noted on Monday that Apple's component prepayments increased by $1.15 billion sequentially in the June quarter. He also noted that Apple's increases in inventory component prepayments have been followed by "a solid ramp-up in revenue" in the proceeding two or three quarters.

Comments

  • Reply 1 of 20
    nonimusnonimus Posts: 60member


    So, when's the bubble going to pop?


     


    I can't imagine they could possibly keep this up until the end of Tim Cook's contract in 2021.

  • Reply 2 of 20


    Asymco.com has a more indepth analysis of this...

  • Reply 3 of 20
    solipsismxsolipsismx Posts: 19,566member
    nonimus wrote: »
    So, when's the bubble going to pop?

    I can't imagine they could possibly keep this up until the end of Tim Cook's contract in 2021.

    I don't see any artificial growth so I do see how their business will pop. I do see how all their products can eventually plateau but remember they focus on the higher end of the market and then carefully move into the lower end so there is a plenty of room to grow in all areas expect the PMP market which has been on decline for awhile now.
  • Reply 4 of 20

    Quote:

    Originally Posted by nonimus View Post


    So, when's the bubble going to pop?


     



    Growth is not a bubble.  A bubble is when prices go up incommensurate with the underlying growth or value.  This is the real deal.

  • Reply 5 of 20


    I had to laugh very hard at this graphic that was manipulated long enough to finally show a correlation. Not only are the axes scaled differently, which can make sense, but also the zeros for two two curves are at different heights... 


     


    Normalizing expenses and revenue to a common value for the year 2005 one would see that the expenses are growing at a much faster rate than the revenue. I would be worried about that!

  • Reply 6 of 20


    in fact, this woman is scamsumging content of Asymco's website... 

  • Reply 7 of 20
    philboogiephilboogie Posts: 7,671member
    nonimus wrote: »
    So, when's the bubble going to pop?

    I can't imagine they could possibly keep this up until the end of Tim Cook's contract in 2021.

    Ah, but that's the beauty of Apple: it doesn't stand or fall with one single person. But you might have posted because you read somewhere that he has his contract expired in 2021.

    The beauty of Apple, Inc. is that each employee is part of the whole, and they all feel the need to excel, to not work because of a paycheck, but to be part of something much larger. See their Job Opportunity page.

    1000
  • Reply 8 of 20
    mr. memr. me Posts: 3,221member

    Quote:

    Originally Posted by lolplot View Post


    I had to laugh very hard at this graphic that was manipulated long enough to finally show a correlation. Not only are the axes scaled differently, which can make sense, but also the zeros for two two curves are at different heights... 


     


    Normalizing expenses and revenue to a common value for the year 2005 one would see that the expenses are growing at a much faster rate than the revenue. I would be worried about that!



     


    There is nothing unusual or untoward about the graph. It is standard graph type called "Double-Y." Look it up.

  • Reply 9 of 20
    jragostajragosta Posts: 10,473member
    lolplot wrote: »
    I had to laugh very hard at this graphic that was manipulated long enough to finally show a correlation. Not only are the axes scaled differently, which can make sense, but also the zeros for two two curves are at different heights... 

    Normalizing expenses and revenue to a common value for the year 2005 one would see that the expenses are growing at a much faster rate than the revenue. I would be worried about that!

    That's because you don't understand the math.

    The graph suggests that Apple would get SOME sales, even without any capital expenditures. For incremental capital expenditures above zero, the sales grow by some amount - and the graph indicates that there is a relationship between incremental investment and sales.

    Now, I'm a bit skeptical of using that graph as a predictive tool for several reasons, but there's nothing wrong with the graph itself or the math involved. Reasons to be skeptical:
    1. Capital investment can take a long time to turn into incremental production and incremental sales. Huberty is suggesting that it occurs over 6 months - which may be too short a period
    2. Apple has changed its payment method significantly over the past few years. At one time, they operated like most businesses: "send us and invoice and we'll pay it in 15/30/60/90 days". Today, they're pre-paying for a lot of goods. If they were using consistent payment methods, the correlation would make more sense than trying to sort it out when their payment methods are changing.

    That said, if a large part of the expenditure is for inventory, then it makes sense that a rapid increase in inventory means that Apple expects a huge quarter. But lumping inventory with capital expense is a silly way to do things.
  • Reply 10 of 20
    sockrolidsockrolid Posts: 2,789member

    Quote:

    Originally Posted by AppleInsider View Post



    She believes Apple is in the process of purchasing tools and machinery for new production processes ...




     


    Liquidmetal production processes???

  • Reply 11 of 20
    SpamSandwichSpamSandwich Posts: 33,408member

    Quote:

    Originally Posted by jragosta View Post





    That's because you don't understand the math.

    The graph suggests that Apple would get SOME sales, even without any capital expenditures. For incremental capital expenditures above zero, the sales grow by some amount - and the graph indicates that there is a relationship between incremental investment and sales.

    Now, I'm a bit skeptical of using that graph as a predictive tool for several reasons, but there's nothing wrong with the graph itself or the math involved. Reasons to be skeptical:

    1. Capital investment can take a long time to turn into incremental production and incremental sales. Huberty is suggesting that it occurs over 6 months - which may be too short a period

    2. Apple has changed its payment method significantly over the past few years. At one time, they operated like most businesses: "send us and invoice and we'll pay it in 15/30/60/90 days". Today, they're pre-paying for a lot of goods. If they were using consistent payment methods, the correlation would make more sense than trying to sort it out when their payment methods are changing.

    That said, if a large part of the expenditure is for inventory, then it makes sense that a rapid increase in inventory means that Apple expects a huge quarter. But lumping inventory with capital expense is a silly way to do things.


     


    I'm thinking Huberty is simply wrong as ususal. Outlays for equipment would need to happen much earlier. Purchases now would probably be for next year.

  • Reply 12 of 20
    focherfocher Posts: 685member
    nonimus wrote: »
    So, when's the bubble going to pop?

    I can't imagine they could possibly keep this up until the end of Tim Cook's contract in 2021.
    There's actually no evidence that Apple cannot continue its upward climb. In the last 11 years, they have created 3 separate brand new multi-billion dollar revenue categories (iPod, iPhone, iPad). The negativity is fed by this premise that Steve Jobs left some pipeline of products that Apple will milk, but that there won't be anything new. How long that view persists, no one knows, but it inevitably will fade over time. Then people will realize that the greatest thing Jobs created was the culture at Apple which is what creates great products.

    The only question is whether that culture is stamped out by someone. I don't see Tim Cook stamping it out.
  • Reply 13 of 20
    dickprinterdickprinter Posts: 1,060member


    Chaaaaa-ching!

  • Reply 14 of 20
    jd_in_sbjd_in_sb Posts: 1,600member


    Great news. Apple deserves every penny.

  • Reply 15 of 20

    Quote:

    Originally Posted by SpamSandwich View Post


     


    I'm thinking Huberty is simply wrong as ususal. Outlays for equipment would need to happen much earlier. Purchases now would probably be for next year.



    Horace Dediu at Asymco has done a great job correlating Apple's capital expenditures with IOS device sales.  You're correct, the expenditures do come earlier, but Dediu has made a strong case that they come approximately one quarter earlier, not a full year.

  • Reply 16 of 20
    andysolandysol Posts: 2,506member

    Quote:

    Originally Posted by PhilBoogie View Post





    The beauty of Apple, Inc. is that each employee is part of the whole, and they all feel the need to excel, to not work because of a paycheck, but to be part of something much larger. See their Job Opportunity page.


     


    Of course....

  • Reply 17 of 20


    It could be just lawsuit expenditures too you know. haha.


    They sure are footing a lot of lawyer's bills.

  • Reply 18 of 20

    Quote:

    Originally Posted by SockRolid View Post


     


    Liquidmetal production processes???


     



     


    If they do go liquid metal chassis (which I don't think they will), it would be that extra wow factor that would take the heat off Apple for not being different enough from the iPhone 4 and 4S. Personally, I can't think how the 4 and 4S can be improved upon design wise but I'm guessing liquid metal would do it. The molten metal in your hand look would be damn sexy.

  • Reply 19 of 20
    aaarrrggghaaarrrgggh Posts: 1,608member

    I'm thinking Huberty is simply wrong as ususal. Outlays for equipment would need to happen much earlier. Purchases now would probably be for next year.

    Paying for a supplier's tooling is a little more questionable from a tax/accounting perspective; creating a long-term purchase program or pre-paying for goods isn't as problematic. I doubt they could pay a supplier a year in advance of delivery, but paying for a part that starts manufacture, which won't make it into a consumer's hands for 6 months is pretty plausible.

    But it wouldn't be the first time Huberty was wrong...
  • Reply 20 of 20
    wizard69wizard69 Posts: 13,377member
    mr. me wrote: »
    There is nothing unusual or untoward about the graph. It is standard graph type called "Double-Y." Look it up.

    Just because the graph has a name doesn't imply that they are used ethically in every case. This has all the signs of manipulation to support a point of view that may not have anything to do with reality.
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