Apple (AAPL, Financial) is a company that is incredibly difficult to value because of its short product cycles. Earnings are high, true, but they could fall back quickly if and when next year’s product isn’t a hit. Costs are always harder to scale back as quickly.
Gurus I greatly respect like David Einhorn (Trades, Portfolio) and Carl Icahn (Trades, Portfolio) have taken up their allocations to 20%-plus levels. Meanwhile, I have consistently underestimated how well Apple would do given its meteoric rise over the past decade.
Forecasting earnings or quarterly sales is not something value investors tend to pride themselves on, but as a contestant in the Good Judgment Project I was "forced" to think about the question:
Will Apple sell more than 75 million iPhones in its December quarter?
This question has real world value in that iPhone sales make up approximately two-thirds of Apple's sales, and its success moves the share price. Thinking about the specific December quarter will also give more insight into the subsequent quarters; iPhone sales are incredibly important to the success of Apple for two reasons:
- The direct profit on the goods sold.
- Bringing/keeping customers within the Apple ecosystem where Apple is receiving a cut on every piece of software sold to iPhone users.
The first thing I did was establish a baseline view, which tells me there is a high probability Apple sells in excess of 75 million iPhones in the December quarter (fiscal Q4 2015) as it sold almost that many last year, and the company pretty much always beats the previous year's quarter. The Statista chart below clearly shows how the December quarter tends to outperform other quarters and the trend in sales:
(click to enlarge)
Source: Statista
The graph from BI Intelligence below shows sales growth has been slowing over the years, but there is nothing in the historic data that points to Apple not hitting the 75 million mark for the December quarter.
(click to enlarge)
Source: Business Insider
After reviewing a wide variety of information available on iPhone sales, I put some of the more important bits in the table below. The bearish signals outnumber the bullish ones, but that does not tell us anything about the gravity of each.
When taking in the information below, it is important to guard against double counting. News from suppliers suggests Apple may fall short of the 75 million mark, and this is heavily weighted in recent analyst reports. If you double count the recent bearish analyst reports and the supplier data, you may be overadjusting sales projections downwards.
| Bullish | Bearish |
| Tim Cook said on an analyst call Apple will likely sell a record number of iPhones this quarter (between 51% and 80% or he would have likely used different wording). | Strong dollar vs. global currencies may impact global sales. |
| Apple released the 6s and 6s plus in China earlier as compared to the comparable quarter last year which should give it a head start. | Midrange Android phones are becoming stronger competitors. |
| Pop-up ads pushing upgrades in app store. | Last year's same quarter figure is especially strong due to the screen size increase. |
| Median analyst forecast is still for 2% year-over-year sales growth which is enough to beat 75 million. | Apple is expected to release a smaller and cheaper iPhone in 2016 for which some people will wait. |
| Supplier numbers do not perfectly correlate with iPhone sales and older iPhones also count toward the 75 million number. | Apple suppliers reported bearish numbers that caused several analysts to downgrade numbers. Be careful not to double count both the downgrades based on supply chain figures and the supply chain figures themselves. |
| Â | Pop-up ads pushing upgrades in app store. |
| Â | MacRumors.com reports holiday iPhone activations are slightly down vs. last year, but this is on a market share basis in an expanding market. |
| Â | Recently analyst forecasts, which are more valuable, have been bearish in nature, but the main cause is the already mentioned supplier numbers. Also their bearishness on iPhone sales is mostly directed toward next year, beyond the December quarter. |
| Â | Dec. 29, 2015 Stifel Nicolaus reports Foxconn (supplier) reduced overtime because of Christmas sales coming in 5% to 10% below expectations |
Cook stating Apple will likely post record numbers is a very important consideration, but it loses some of its gravity because it is less fresh of a signal as compared to Foxconn reducing overtime in response to lower-than-expected Christmas sales.
I've included pop-up ads pushing upgrades in app stores as both a bearish and bullish signal because I am not sure how to interpret it. It could be construed as bullish as Apple is going beyond previous efforts in order to hit expectations, but it can also be construed as Apple needing to go to this length in order to hit expectations.
MacRumors reporting a lower number of activations is also an interesting piece of information because it does not report actual activations but market share of activations, which is not as bearish since the market is growing.
Depending on how you weigh all of the above you will arrive at a frequency with which Apple will beat 75 million iPhones sold for the December quarter. When I go through this exercise I end up with the conclusion it still looks like a very close race. This conclusion may still be valuable to Apple shareholders. First of all the consensus of 484 forecasters on the Good Judgment Project is that Apple will make it. Their 911 forecasts imply there is an 82% likelihood the U.S. company will exceed the 75 million number.
If the consensus in the general market is still that the company will hit the 75 million mark and sales will only fall off next year, a miss may still cause a meaningful drop in the share price. Note, the views of the good judgment forecasters do not necessarily reflect the views of the market.
If you look at Apple’s stats, it is implied the market thinks the company isn’t going to repeat the successes of the past decade over the next one. The average or mean multiples for both the Standard & Poor's 500 in general and the tech sector specifically are much higher.
Cook meanwhile has proven to be a capable leader and, with some help of activist investor Carl Icahn (Trades, Portfolio), even forthcoming returning money to shareholders. There have been no major disastrous acquisitions so far. The company has a lot of cash and cash flow; its financial position is rock solid.
Short term things could be quite rocky for Apple. If I go out on a limb and equate the good judgment forecasts with the opinions of the retail investor and the financial media, earnings and sales target misses are going to receive a lot of surprised commentary, and retail investors may sell after being disappointed. Meanwhile, the price of Apple already implies the market expects earnings and sales to fall back some.
When the stock drops on retail disappointment following a quarterly miss, about 30 days out, it may be time for the value investor to act.
