Apple’s Earnings All About iPhone, iPhone, iPhone

Apple (NASDAQ:AAPL) is set to announce its Q1 FY2012 results after the markets close on April 24. While we do not expect this quarter to be as spectacular as the previous one, even a small disappointment could wreak havoc on the stock which has risen by more than 40% since the start of the year. During the earnings call, we will watch the company’s iPhone numbers to see if it has been able to sustain the record sales from last quarter when the iPhone 4S was launched. Also of special interest will be iPad unit sales, which may have been bolstered by the launch of the third-generation iPad last month. Apple faces increasing competition in the mobile devices segment from both Google (NASDAQ:GOOG) as well as Microsoft (NASDAQ:MSFT), which is increasingly trying to push Windows as the third mobile ecosystem this year.

Last quarter’s performance pushed Apple’s stock up to all-time highs of $644, which was almost 60% higher than the levels at the start of the year. To repeat that performance will be tough, however, as evidenced by the heavy profit taking that has happened since bringing the stock down by more than 10% from its highs as the Q2 earnings draw close. We maintain a price estimate of $550 for Apple, about 4% below the current market price, accounting for the risk that the iPhone 4S momentum may not sustain. We will update our model following the results.

See our complete analysis for Apple stock here

iPhone

Apple’s momentum since the start of the year is largely due to strong iPhone 4S sales in the last quarter of 2011. The company had banked on the phenomenal success of the iPhone 4S to sell more than 37 million iPhones last quarter, besting its previous high of 20.3 million by a large margin. Since the iPhone drives more than half the company’s value by our estimates, it was understandable that the spectacular iPhone sales would have that kind of an impact. (see Apple Worth $550, iPhone Drives Half of Value)

However, the fact that the holiday quarter is over and the iPhone sales may be flagging slightly seems to have caught up with the market expectations now. This is not to say that the iPhone sales this quarter would be a major disappointment since checks have shown that the iPhone 4S still tops the best-seller lists at all the major carriers it is being sold at in the U.S. (iPhone 4S Continues To Be The Best-Seller At AT&T, Verizon & Sprint) Verizon just announced that it had sold 3.2 million iPhones in the March quarter, below December quarter sales but far more than any of the previous quarter sales.

Moreover, Apple also brought the iPhone 4S to China this quarter and even roped in China Telecom to sell the iPhone in addition to longtime partner China Unicom. But considering that China is still in a very nascent stage of 3G penetration, Apple may find it tough to match the record iPhone sales that the pent-up holiday demand from the iPhone 4S delay had led to.

Still, longer term, China holds a lot of promise considering the huge 2G subscriber base that the carriers there are trying to transition to 3G (3G penetration is currently only 14% in China). A deal with China Mobile, the largest carrier in the world by subscriber base, is looking increasingly likely following Qualcomm’s recent announcement and Apple’s similar deals with the other two carriers. This deal is very important for Apple as it instantly doubles its current addressable market for the iPhone in China and can act as the next big boost to its stock.

The iPhone contributes to over half of our price estimate.

iPad

Apple launched the new iPad in March to another tremendous response, selling over 3 million units in its opening weekend itself and taking its stock even higher. While we expect the new iPad to have sold well this quarter, it was only available for a third of the entire period. Moreover, the iPad contributes only about 13% to Apple’s stock value; so the overall impact may not be much.

Going forward, we see the iPad performing well in the absence of meaningful competitors in the tablet market and the very nascent stage that the market is in. However, a very potent threat in the form of Microsoft’s Windows 8 looms on the horizon.

Microsoft plans to launch Windows 8, which will be made available on both PCs and tablets, later this year. A lot of PC as well as smartphone manufacturers are expected to jump in on the offering to tap the nascent tablet market. Microsoft has a widely installed PC base in place that it can leverage to pose a big threat in the young market. Moreover, it can also leverage its partnership with Nokia to push for an integrated experience across all devices, mobile or PCs, in order to create a viable third ecosystem.

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