Apple Investors: A Colossal Quarter Is Not Enough (But This Is)

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Apple Inc. AAPL is set to release earnings on January 27 after the bell, and it could be the most anticipated earnings release in the history of the financial markets.

Here’s a quick chart of Apple’s revenue (TTM) and various milestones.

Apple will likely report its largest quarterly revenues -- ever -- on the back of iPhone 6 and iPhone 6 Plus sales. Early indications from component suppliers are very strong.

Additionally, early indications from wireless service providers are also strong; one report stated that over 50 percent of new activations in the United States during the holiday season were for the iPhone (a substantially larger number than Apple’s current global market share of ~41 percent).

Estimates from China are also coming out larger than ever.

Next, let’s look at a visualization. It shows just how large Apple is in the technology sector, and plots total revenue (TTM) on the x-axis and net income (TTM) on the y-axis.

Quite simply, there is Apple, and then there’s everybody else.

At one point, 62 million iPhone sales was considered awfully bullish for this quarter (fiscal Q1). Some pundits started creeping in with the idea of 65 million units sold. Now the company stands at a point where 70 million iPhone sales for the quarter may be the target and that number is, without hyperbole, colossal.

Earnings estimates call for $2.59 per share ($15.2 billion), with some analysts expecting a high of $2.97 per share ($17.4 billion).

On the revenue side, estimates call for ~$67 billion, although a $74 billion + “whisper” number is out there.

One thing to remember: The mix of phones purchased matters a lot.

Margins are higher on the iPhone 6 Plus than any other iPhone (including iPhone 6) per a note from Morgan Stanley, and there is preliminary data that suggests the mix of iPhone 6 to iPhone 6 Plus sales was moving more toward the Plus model as inventory became available in December.

Let’s now turn to a second visual that plots market cap on the x-axis and research & development (R&D) (TTM) on the y-axis.

Interestingly, while Apple is the largest company by a lot whether one measures by revenue, net income or market cap, it does not spend the most on R&D. Microsoft Corporation MSFT, Intel Corporation INTC, Google Inc GOOG GOOGL, Cisco Systems, Inc. CSCO and International Business Machines Corp IBM all spend more. 

Apple has fewer products than many of those firms, and also has a more focused approach.

In the final “broad” chart, let's plot market cap on the x-axis again, but this time, put stock repurchases on the y-axis.

Yet again, it's clear: There’s Apple, and then everybody else. Apple has cash and is spending nearly $100 billion of it to buy back stock over a three-year period.

Here’s a look at a time series of Apple’s stock buy backs. Note that there were $0 (zero) from 2007 through 2012.

Let’s now focus on financial measures more myopically to Apple. The next visual plots one-year total revenue in the blue bars and one-year cash from operations growth in the red line.

Back in 2012, it experienced year-over-year 70 percent revenue growth –- just astounding. That growth has finally come back to “human levels,” but is still well above 10 percent for a firm that’s already enormous.

Apple is in this incredible place where it’s a behemoth, pays a fat dividend and buys back huge amounts of stock, but is still growing revenue quite significantly (those blue bars are always positive).

Let’s stay with this thread and plot net income (TTM) below.

Here’s something that has received little attention: Apple had larger net income in 2012 (TTM) than it does now.

Yep, earnings are smaller.

This is where it’s key to look at actual net income, and NOT earnings per share (EPS). The stock buyback gluttony has reduced the number of shares outstanding by a significant amount and makes EPS look larger.

That’s smoke and mirrors. The actual net income numbers are down from $41.7 billion in the year ending September 20, 2012 to $39.5 billion in the year ending September 27, 2014.

For the first three quarters of calendar (not fiscal) 2014, Apple reported net income of $8.467 billion, $7.748 billion and $10.223 billion, respectively (for Q3, Q2 and Q1). That totals to $26.44 billion with calendar Q4 still to be reported.

Using the estimates from the top of this article, that leaves Apple’s net income for 2014 calendar year in a range of ($41.6 billion, $43.8 billion), compared to the all-time high realized TTM number of $41.7 billion reported for fiscal year 2012.

Yes, estimates still put Apple’s net income in 2014 below those achieved in 2012.

So What?

If Apple hits consensus estimates, net income will still be below the value two years ago. If Apple blows out consensus, net income will be ~5 percent-7 percent larger than its all-time high in 2012.

So… there’s got to be something else that will move the needle for this company in the future.

And, of course, Apple knows that.

The needle-mover, in some part, is supposed to be the Apple Watch. After all of the revenue, net income and margin numbers come pouring out of the earnings call, listen for news on the Watch. There's no way to actually know when it will be released, other than early 2015.

It could be Valentine’s Day, it could be March, it could be summer. For investors really in search of the stock-moving news on this next earnings call from Apple, the Watch is it.

If Apple reports a blow-out quarter and finishes with an announcement that the Apple Watch will be available for sale before Q1, the stock could explode up. But, if there’s no news on the Watch, or even “delayed news” on the Watch, all the iPhone sales in the world may not be enough to push the stock to all-time highs.

A colossal quarter is not enough to be bullish on Apple. But there are plenty of other headlines that could make a bull out of anyone.

Ophir Gottlieb can be found on Twitter @OphirGottlieb

Image credit: Luis Villa Del Campo, Flickr