Real Kato Blog: Apple Posts Record Profit, Stock Plunges

Sometimes I think Wall Street investors are a bunch of idiots.

Yesterday Apple announced its fiscal 2008 first quarter results: $9.61 billion in revenue, resulting in $1.58 billion profit ($1.76 per share). Compared to the same period a year ago, that represents a 54.4% increase in earnings and a 35.4% increase in revenue.

Overnight, the stock lost about 13% of its value. Why? Because Apple's conservative second quarter forecast came in below expectations, and is seen as a further sign of a weakening economy.

Let's take a look at that 2Q forecast. Apple projects $6.8 billion in revenue, and earnings of $0.94 per share. Compared to 2007, that represents a 29.2% increase in earnings, and an 8.0% increase in earnings.

Now certainly, an 8.0% increase in earnings is sub-par for Apple these days. But Apple has always been extremely conservative in its early guidance. Last year, Apple projected second quarter earnings of $0.56 per share; the actual second quarter results were $0.87 per share. If Apple gets its 2008 second quarter earnings up to, say, $1.10 per share, then that gets us up to a healthy 26.4% jump in earnings. And despite the fears of a looming recession, I think $1.10 per share is easily reachable for Apple.

Here's where the real idiocy comes into play, though. This pattern of Apple announcing record results, only to have the stock plummet, has happened for several years in a row.

In 2006, Apple's stock dropped 7.8% after its 1Q earnings announcement, from $82.49 to $76.09, and eventually touched a year low of $51.41. By the end of the year, the stock had recovered to $84.84.

In 2007, Apple's stock dropped 6.2% after its 1Q earnings announcement, from $94.95 to $89.07, and eventually hit a low of $82.86. By the end of the year, the stock price was $198.08.

And it's not like the stock was grossly overvalued at $200 per share. That value represents a trailing P-E ratio of about 50, which is not out of the ordinary for a company that is recording double-digit growth.

Looking forward: Apple has sold about 3.7 millions of iPhones to date, and almost all of those iPhones represent ongoing revenue that gets kicked back to Apple from carriers like AT&T. The new AppleTV is being well-received, and each one of those is a potential source of movie rental revenue. Apple sold over 2.3 million Macs in the quarter, and each of those are a source of revenue for software and accessories. Apple is sitting on a horde of cash and has no debt, meaning they don't have to worry about a tight capital market. You've got a company here with steady income streams, popular products, plenty of buffers against any downturns, and a penchant for creating market-disrupting innovations. And yet, the stock price is dropping. Unbelievable.

Apple's stock is at $135.12 as of this writing. Stock pattern analyzers are probably picking up negative indicators based on the pattern of the stock's price movement, and a lot of computer trading algorithms are probably responsible for the current oversold condition. But those algorithms have been notoriously poor at predicting Apple's technological advances.

In 2006, investors and analysts were greatly concerned about Apple's ability to pull off its Intel transition, but they didn't predict what a monster the iPhone would become. This year, investors and analysts are greatly concerned about Apple's ability to profit from its movie rental strategy and its popular-but-no-longer-revolutionary product offerings... but they are certainly not accounting for Apple's Next Big Thing.

Permalink 1 Comment

Posted by Ken in: commentary, techwatch

Comments

Comment #1 from Ken (realkato)
2008 Jan 23 - 5:11 pm : #

Some folks are apparently seeing the light.

From Charles Wolf, an analyst at Needham & Co., quoted in a BusinessWeek article: "I think this is an outrageous buying opportunity. It's not a cheap stock, but you're getting a company that can grow at 25% a year for who knows how many years, at 25 times earnings. To me, that's a steal -- recession or no recession."

Comments are closed for this post.

Search This Site