Apple Worth $550, iPhone Drives Half of Value

Apple (NASDAQ:AAPL) blew past expecations when it announced its Q1 FY 2012 results Tuesday afternoon, posting record sales in almost all of its major products. ^[1] The iPhone, the iPad and the Mac saw record sales last quarter helping Apple post revenues of $46.3 billion that not only exceeded its own estimates by almost 25% but also most analysts’ as well. Net income also surged to $13 billion, which is around 116% ahead of Q1 FY 2011. To put this figure in context, Google’s (NASDAQ:GOOG) entire revenue last quarter was $10.6 billion.

The record earnings was cheered by the market as the stock dismissed the ‘buy the rumor, sell the news’ chatter in the market. The stock climbed almost 8% in after-hours trading post announcement.

See our complete analysis for Apple stock here

iPhone 4S remains true to hype

Banking on the phenomenal success of the iPhone 4S, the company sold 37.04 million iPhones last quarter. This figure dwarfs the previous iPhone sales record of 20.3 million Apple posted only two quarters back. The record number of iPhones sold underlies the huge pent-up demand that was created by the delay of the iPhone 4S as customers postponed buying an iPhone in anticipation of the new one. Delays are mostly seen as detrimental to a company’s market share but this doesn’t seem to be the case with Apple.

A higher mix of iPhone 4S within the overall iPhone sales also helped Apple stem the sequential decline in average iPhone pricing seen over the last few quarters, even as the company lowered the prices of the older iPhones in order to capture more market share. Given that the iPhone accounts for over half of our stock value, we expected a positive surprise in this alone to help carry the shares higher. (see also iPhone 4S Could Have Big Impact on Apple’s Earnings.) We now have a price estimate of $550, in light of the record earnings.

Kindle Fire doesn’t so much as dent the iPad

The iPad also saw record-setting sales of 15.4 million, comfortably beating its earlier record of 11.12 million sales posted in the previous quarter. This despite the availability of much cheaper options such as the Kindle Fire and the Nook tablet in a strong holiday season.

In our earnings preview, we had talked about how we do not expect the 7-inch cheaper rivals to impact the iPad much given the strong demand for tablet devices. The tablet market is still in a nascent stage with very few popular tablets, so there is enough room for more competitors to enter and coexist. Moreover, we believe that the Fire may even have played into Apple’s hands by lowering the entry barrier for the tablet market and bringing in potential future iPad customers.

However, sooner or later, we believe the iPad will see price cuts beyond the customary lowering of prices of the older iPad versions as the tablet market matures and Apple sees the need to lower prices in order to increase market share. But the lower gross margins that the iPad has around 30% as opposed to the company’s average 40% may cause Apple to delay that decision.

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1. Apple’s CEO Discusses Q1 2012 Results – Earnings Call Transcript, Seekingalpha, January 24th, 2011 [↩]