Disappointment, thy name is expectation. Still, notwithstanding the vicissitudes of the short-term horse race, the disconnect between Apple's growth (~65% on top and bottom) and its valuation 13.5x is as wide and attractive as ever. This is a buying opportunity.
AAPL is well positioned to capitalize on stronger than expected growth in mobile devices, improving penetration in the enterprise, and broadening distribution in China. While consensus gross margin is likely to be reset soon, strong revenue trends largely offset the margin downside and I continue to expect upward EPS revisions in the near-term.
The main surprises were the strength of iPhone unit sales, the slight weakness of expected iPad volumes and the lower-than-expected gross margin. I expect iPad sales to pick-up strongly next quarter, with the Q4 being adversely impacted by component shortages. However, the margin issue is possibly a longer term concern. Apple appeared keen to emphasise its first mover advantage in the tablet space. Various sources (e.g. iSuppli) have performed breakdown analysis that indicates that margins on the iPad are actually lower than those available on the iPhone. As such, a focus on extending its lead here could result in lower margins for the group overall.
Again, the one disappointment, if it can be called that, was iPad shipments. These came in at 4.2 million, up from 3.3 million in June. While the Street was expecting a higher number, it's instructive to note that iPad shipments have exceeded Mac shipments in just two quarters......
Revenue upside was driven by significantly better iPhone units, offsetting slightly lower than expected iPad sales (still up 28% Q/Q). Some investors will be concerned with the lower than expected gross margin given the expected volume leverage. Apple revenue guidance, which is typically conservative, actually was above Street consensus.......
Apple is aggressively pushing the price performance envelope (more value for the same price as prior gen product) and driving strong unit growth and supply constraints. AAPL is on the right side of the price/performance elasticity equation and is extending its first mover advantage (iPhone and iPad). Looking forward, I expect GM to benefit from mix and scale benefits in iPhone and iPad.
Despite pending competition (particularly Android) I foresee sustained global share gains in 3 large, underpenetrated markets -- iPhone, iPad, Mac -- via sustained product leadership. Pending catalysts include: strong holiday sales, new products, healthy GMs. Apple should benefit from subsequent product generations and accessory cycles.
Apple remains a long-term share gainer with low penetration in large addressable markets, with margin expansion opportunities.
Apple now has 317 stores worldwide, 24 of which were opened during the quarter and 16 of which were opened in international markets. Of particular note was the opening of the Beijing and Shanghai stores that took place on the last day of the September quarter. Both Chinese locations recorded higher sales in the first day than any other store opening in company history.
Apple's industry-leading software ecosystem (over 120M installed base of iOS device sales) and its leading hardware expertise will lead to a strong multi-year product cycle for its key products. In fact, based on Apple's strong results and solid sales guidance for its December quarter combined with my expectations of strong longer-term trends for iPhone and iPad sales, I anticipate strong earnings growth for Apple over the next two years versus the coverage universe.
iPhone shipments exceeded even the most aggressive forecasts on the Street, driving $2B of upside to the revenues estimate.
Driven by a growing portfolio of well-designed, easy-to-use, media-centric devices/software, coupled with strong earnings growth and a cash-rich, debt-free balance sheet, AAPL's a compelling buy.
Gross margins of 36.9% were below Street consensus expectations of 38%. Meanwhile, iPad units came in below elevated investor expectations. Despite these bumps, Apple's meteoric revenue and profit growth and 14.1 million iPhone units should be enough for the bulls to keeping running.