Bean Counters Trip Up Apple Bulls

There is a lot of noise swirling around the shares of Apple, Inc (AAPL-NASDAQ). The health of Steve Jobs is a concern, but the bean counters might get much of the blame for Apple's revised guidance.

Apple fans took Research in Motion (RIMM-NASDAQ) to task after they raised revenue guidance but lowered EPS estimates due to higher R&D and marketing spending. But now Apple is raising spending as well, while cutting both revenue and earnings guidance, and the market will be dishing out some tough love to shareholders today. A move by bean counters is responsible for much of the lowered revenue guidance; new accounting treatment for the iPhone 3G is the culprit, according to ThinkPanmure:

Apple guided F4Q (September) to revenues/EPS of $7.8B/$1.00 versus consensus of $8.3B/$1.25. The revenue shortfall is almost entirely due to the new subscription accounting model for the 3G iPhones, as it amortizes the revenue from the iPhone over 24 months versus the prior model of upfront revenue per iPhone sale. The fourth-quarter gross margins estimate is at 31.5% and the tax rate estimate is at 30.5%. With revenues being off and gross margins down sequentially, EPS for 3Q (September) is down 19% Q/Q. ThinkPanmure Research Note

Of course, there is plenty to like, but Apple fans will not be able to jawbone the stock higher today.

The Mac continues its strong growth, with units up 41% Y/Y to approximately 2.5M units. MAC channel inventory, at three to four weeks, continues to be below the target of four to five weeks. Every 1M additional Mac units sold, or 10% upside unit sales, adds $0.30 to AAPL’s EPS, in our estimation. iPod sales were at 11M in the quarter. AAPL expects to end 2008 (September) with 242 Apple stores and retailing through 570 Best Buy stores.

The 3G iPhone has significant stockouts at Apple stores. AAPL expects to be in 40 countries by August 22, from 22 countries currently. The iPhone is starting to get corporate IT adoption—33% of Fortune 500 companies—including Oracle, Genentech, and Disney, among others, increasing competition for Research in Motion. * Guidance for 2009, at gross margins of 30%, is impacting our and Street FY09 (September) EPS as consensus expectations were for 34% gross margins.

We are revising our 4Q08 (September) estimates from revenues/EPS of $8.3B/$1.28 to $7.9B/$1.03. Our FY09 (September) is adjusted from $40.7B/$6.32 to $41.3B/ $5.74. We are raising our top-line revenue estimate as 3G iPhone sales run well ahead of expectations, with demand outstripping supply, offset by lower gross margins with a new product lineup. We are lowering our price target from $225 to $200. We recommend that investors buy shares on weakness as AAPL drives a global footprint of its handset and Mac PC offerings.

With Apple pointing to new products, a transition coming, and long-term FY09 (September) gross margins significantly lower, we believe that the company is 1) moving the focus to growing units, the top line, and driving revenues, while also b) lowering Street expectations.

- With Apple expected to launch the 3G iPhone into 40 countries by August 22, and demand substantially outstripping supply, AAPL on the call said it was, “very confident in achieving 10M in 3G iPhone unit sales for calendar 2008.”

- As with the Mac, we believe Apple is building a strong software and applications suite around its 3G iPhone to build an application developer base around it.

Apple’s warchest of cash is approaching $21 billion, or $23 a share. The company is doing fine, but some of the froth is blowing off the stock today.  Fading the hype from the mid-June WWDC was predictable, and the stock’s inability to hold the 200-day moving average yesterday might have been been a hint the stock was going lower today.

I am nearly done setting up my new trading turret after being out of action over the past few days, and digging back in after missing much of the recent gyrations here and elsewhere. Apple’s stock might end up on my sheets, long, for the first time in months. In the sake of full disclosure, dudes, I bought a Dell. I don’t think the analyst from ThinkPanmure cares, however, and is keeping the stock at a buy, while lowering his price target from $225 to $200.

We believe AAPL lowering Street expectations, while building a global Mac and handset franchise, bodes well in the long term for the stock, concerns of CEO Steve Job’s health aside. ThinkPanmure

A franchise, indeed.
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Henry should change the name of SAI to All Apple, All the time.com.

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The content contained represent the opinions of 1440 Wall Street. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author. No Position

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