MorningWord 7/24/13: Are We There Yet? – $AAPL

by Dan July 24, 2013 8:55 am • Commentary

MorningWord 7/24/13:  AAPL reported their fiscal Q3 earnings last night that came in at the high end of their earnings, sales and gross margin guidance (despite being dramatically lowered back in April).  The company reported earnings that were down 20% year over year, following a Q2 that was down 19% yoy, while sales increased just 1% yoy, which was the lowest quarterly increase in more than 10 years.  Gross Margins, which was what most analysts were focusing on to get a sense for AAPL’s ability to maintain their industry high ASPs was also at the high end of their guidance, but down 14% yoy at 36.9% (the lowest gm showing since Q3 2008).   Guidance for fiscal Q4 was below consensus, but as the stocks pre-market activity, up ~4% inline with the implied move suggests that it is not worse than the whisper!

The highlight in the quarter was iPhone sales that were 4 million better than consensus at 31.2 mil vs 27 mil estimate, while the low-light was iPad sales that came in at 14.7 mil vs the 17.5 mil estimate.  While iPhone strength off set iPad weakness, it appears from the gross margin that much of the unit upside in iPhone came from the 4s, not the 5, and this mix-shift suggests continued margin pressure if in fact AAPL’s fall iPhone release at all resembles the current iPhone 5.

To demonstrate the importance of gross margins to analyst estimates going forward, Morgan Stanley analyst Kathryn Huberty, kicked off the QnA on the conference call (transcript here) with such a question:

Q: as you mentioned in the press release today new products will ship this fall and historically gross margins do come down in a product transition quarter? But that’s not reflected in your outlook. So can you talk about why this product cycle might be different?

A: our gross margins to be between 36% and 37% which is consistent with what we expected in the June quarter and on a sequential basis that would mean that gross margin would be largely flat to slightly down. We are on track to have a very busy fall, I’d like to leave it there and go into more detail on October.

So what is she trying to back into?  Trying to get any clue if in fact the next iPhone will be released by the end of Sept, as production, increased staffing and marketing costs eat into the margin in quarters where iPhone is launched.  iPad mix and miss was also an issue but inventory declines in the product could suggest a refresh coming in the fall.

Here is the thing, and you have heard me say it many times in this space before – when the postmortem of AAPL’s fall from grace (from a stock perspective, jury still out on the company) the Q4 2012 refresh of almost every major product line in that period coupled with the evolutionary products released will be the very moment the TOP can be identified.   So as I said Monday in my preview (here):

As we said heading into last qtrs print, we think the stock is a hard press at current levels on the short side, there is a good bit of known bad news in the stock.  Prior to the bounce from below $400 earlier this month, I was frankly shocked that there is anyone left who wants to sell who hasn’t done so already.  Some of the issues facing the stock late last year and early this year have morphed a bit from competition based, to known based in the fact that the entire market may be saturated with high end smartphones, even now affecting the likes of Samsung


One thing I will say that I am fairly sure of, the stock will not bottom on an inline qtr and guidance, it will likely take a beat and raise with the follow up of a new unexpected product or distribution deal with China Mobile.  It will be a process, and incrementally better results after a period of a few misses will not do the trick.

So on the last point, we are getting closer, if the company was able to deliver a new piece of hardware (slightly bigger with possible fingerprint technology) with some sort new services, not just the iOS7 that most have previewed, then the stock may once again get its mojo back.  But if we get into September and there is no press announcement for a product launch and thus no new iPhone in their fiscal Q4, then I suspect the stock once again tests $400.   If a new innovative iPhone can stem the GM and earnings declines then the stock could easily head back to $500 after the Q4 results with increased guidance, possibly back to unchanged on the year.  As I said in my preview, I would rather “buy AAPL than 95% of the stocks in the S&P” and for those of you who have long term time horizons and can withstand what could be a bit of near term uncertainty than the next dip should be bought. The $60 bil share repurchase, the 2.8% dividend yield, rock bottom valaution and the $150 bil in cash on their balance sheet should serve as vol dampening and support, BUT and there is always a but, regardless of release time (Sept or Oct), if iPhone 5s is in fact just an evolutionary upgrade like the 3GS and the 4S, and iOS7 isn’t what is hoped to be, then watch out below!

On a very near term basis, the stock is going to gap above the important technical level of the 50 day moving average and may attempt a run at the what proved to be serious technical resistance in early June.  As Enis laid out in our preview that $465ish level should serve as serious resistance as the last 2 highs made in May and March and the high from Feb, which corresponds with the 200 day moving avg could be the line in the sand on the upside, without any real news.  If the stock can’t hold today’s gains then I fear those of you who keep asking are we there yet, may have to wait just a tad longer.

AAPL 1 yr chart from Bloomberg
AAPL 1 yr chart from Bloomberg