Apple Earnings: Another miss in the making?

Apple did not hit analyst’s consensus estimates last quarter, see table 1 in appendix, and this is a rare event. We see a risk of this happening again, and here is why.

Averages do not tell the full story, with consensus estimates for  Q1 revenue at USD 38,917 and net income of USD 9,521 is just a “point”. Looking at charts 1 it is clear that analysts disagree – we are close to saying “confused” but that might take it too far. However, the discrepancy of Net income estimates a pretty substantial.

But there are outliers of high revenue expectations in the top right and to these estimates there are a wide range of margin expectations, shown as the data labels in chart 1. This long stretch drags the average up.

There seems to be a form of cluster of below revenue and net income in the blue box. In our view this heightens the risk of a disappointment on net income reported on Tuesday. The other analysts could still be right but it is noteworthy that as the revenue estimate increases the margin “confusion” increases as pointed out with the arrow.  

One camp of analysts seems to anticipate problems of controlling continuing high growth and pressure on the margins, while another camp expects continued operational leverage effects to flow all the way to net income. We have highlighted in an analysis before the Q4-2011 earnings release that we are more in the “margin decline” camp. We believe that going forrward Apple will experience increased problems maintaining the margins they have achieved over the last couple of years.

Analysts targets
Overall, the group of analysts have only marginally increased their target for Apple and it is at the USD 518 mark, see chart 2. The price has increased over the last three months and the overall potential has decreased to 23 percent if the target is reached.

So despite some concerns about margins, analysts are just as positive as they were before Q4.  A full 92 percent have a “Buy” recommendation and only 8 percent have “Hold”. No one is negative enough to label Apple with a “Sell” rating.
 
Risks going forward – few new products and margin pressure following.
We will come back to the margin risks in Apple in another analysis, but you can have a look at the analysis “Is Apple like Microsoft or more like Samsung/ Nokia?” highlighting  that Apple is to a far extent a hardware company though with an outstanding ability to capture the essence of easy use. But for how long is this enough to sustain above normal profits? Competition is on the move.

Take a look at this graph and notice that in Q1-2012 expected revenue is equal to the 2008 full year revenue. This huge growth and control of it has been the reason behind the admirable results. 
 
But is Apple able to keep the pace of delivering exciting new products - as it did in the days when Steve Jobs invented “something we just found out we had wanted for years”?

Looking at chart 3 it is clear that iPhone success is critical for the company going forward not just by the growth but the sheer size of the revenue is massive. iPad has pushed a lot since launch and has proved a valuable asset for Apple but the replacement cycle is probably going to be much less than for the iPhone.

Looking at what moves in the competitor’s space then we have Samsung Galaxy as a phone attracting Apple customers. The latest newcomer is the attempt from Nokia to launch their Lumia 900 with Microsoft and apparently they post USD 1bn in marketing to support. These are all attempts to grab some of the profits lying at Apples table. We are still believe that margins will have a hard time from now on.

New Launches
What are we to expect at this reporting of results? Rumours point towards iPad3 launch in March 2012 with at least an improved screen. We would expect some firm information of iPad3 coming and a specific date on this.

 Many expected a big release of iPhone 5 last year but we got iPhone 4S. We say some improvements on the old phone but not a major change. Latest rumours are circling around the ”normal” release cycle in June. This is currently expected to be larger upgrade to 4G and several features which could underpin a replacement cycle.

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