Apple (AAPL) skeptics beware of underestimating the worlds hunger for all things Apple. In April of this year, analysts predictably under estimated Apple’s iPhone sales to their peril, and they just did it again.
Apple has become a world-wide phenomenon that has captivated and mesmorized the general public and pushed their sales into the stratosphere. The most amazing part of the story is that the iPhone, the much loved and hated device on the market only represents 16.6% of the world smart phone market, which by any stretch of the imagination, has plenty of room for growth. This should give anyone who believes that Apple is due for a major pull back some pause.
When it comes to Apple, listening to analysts estimates are as good as predicting the weather. Apple reported $9.32 EPS versus $7.79 a year ago, which is an increase of 32.2% over same period last year. It also reported $35.02 billion compared to last year’s sales of $28.6 billion, which is a 22.5% increase year-over year. Mac sales increased 2%, a record for the June quarter and 3% over estimates. Sales on iPhone were up 28% or 26 million units, which set an all-time June record. iPad sales jumped 84% to 17 million units, which also set an all-time record. Gross margins beat guidance by 1.3% from 41.5% to 42.8%. Even with record numbers Apple stock dropped 5.3% in after-hours trading, or down $31.75.
The reasons for this drop are poor estimates by Wall Street analysts. They believe that if any company averages 31% growth every year, and if they miss that average, then it means that the company did something wrong. What it actually means is that the analysts use very simple analytics to come to a consensus that is usually wrong. What they miss is that the world is going through a period of sever stagnation, Europe is in turmoil, The American economy is teetering, and even the Chinese central bank cut interest rates. So for them to believe that anything short of ‘their’ numbers shows weakness, even though Apple beat many of their own records proves that when it comes to Apple, analysts keep missing the boat. Investors should be very weary when they listen to analysts, specifically when they talk about Apple. Here is why this attitude will cause most investors to miss future growth.
The main driving force behind this estimate is the Chinese market. Chinese sales blew past expectations, and helped deliver a very strong EPS in spite of slowing iPhone growth in the US. China’s 3G base grew 118% year-over-year in June to 176 million subscribers. This is only the beginning in China. The reason for this is due in part to the fact that China’s largest mobile provider, China Mobile (CHL) has yet to come to an agreement with Apple. However, talks are continuing, and the target for an agreement would be around the time of the iPhone 5 launch sometime in October.
China Mobile’s current 3G platform is not compatible with the current version of the iPhone, but they have been building out a new platform that will enable the use of the new iPhone. The new platform, called TD-LTE, will be able to deliver the full functionality of the Apple iPhone. Their current platform, only allows the iPhone to run at 2G. This had been the stumbling block for China Mobile and Apple to come to an agreement. This agreement is not just for the benefit of Apple, but for China Mobile as well. China Mobile has been seeing their subscription numbers stall, due in large part from people migrating to the other Chinese carriers that already have an agreement with Apple. With this agreement in place, Apple would have the entire subscription base of China Mobile, about 660 million, as possible to iPhone users.
To put this in perspective, if only 5% of subscribers switch to Apple in the first 6 months of the agreement, that would translate to an estimated 33 million new iPhone users. At a cost of $600/phone that translates into approximately $19.8 billion in iPhone revenue over just a 6 month period, and this is just one carrier. It is plain to see that Apple has plenty of upside potential moving forward.
Another thing to take into consideration is that Apple has only recently released the iPad in China, and those numbers were not part of the revenue for their 3rd quarter. If iPhone sales are any indication of iPad sales China, then we are looking at another record quarter.
It is plain to see that Apple has plenty of room for growth, and that analysts have once again misdiagnosed bad news out of good numbers.
Eugene Groysman who is the Marketocracy Master who has made more money trading Apple than anyone else wrote this article. Click here to view his track record.
