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How To Beat A Recession: Apple Style

23 January 2009 3 Comments

Apple came out with their earnings yesterday and they were incredible.  It’s amazing how this company is able to perform at such a high level even in an absolute terrible economic environment.  Imagine what their numbers would be like in a good economic environment!

First, it is worthwhile to note the arguments against Apple these days.  Retail is a terrible business to be in (except if you’re Apple).  Apple’s products are way too expensive for this economy (unless those products are far superior to the competition that they justify their premium pricing).  iPod’s are everywhere which means there is no more growth for this product (unless you have new models and more software via the App Store).  Simply put, Apple figures out how to get it done no matter the state of the economy.

2009 Q1 Earnings

Here are the numbers for this quarter:

  • $10.2 billion in revenue (GAAP)
  • $1.6 billion in profit (GAAP)
  • $1.78 EPS (GAAP)
  • $11.8 billion in revenue (non-GAAP)
  • $2.3 billion in profit (non-GAAP)
  • approx. $2.55 EPS (non-GAAP)

The first thing to note is that the consensus analyst estimate of Apple’s EPS for this quarter was $1.38.  So, they were off by $.40!!  These people are being paid to follow Apple and they are incredibly horrible at estimating Apple’s performance each and every quarter.  The other thing to point out is the non-GAAP numbers of Apple which are enormous.  Remember, because of the subscription-accounting method for iPhone sales, their numbers can be misleading.  The non-GAAP numbers are more reflective of the sales that occurred this quarter.  Huge numbers!

Innovation and Superior Products

This is the foundation of Apple’s success.  Simply put, their products are just better than the competition across the board.  Their Mac computers are incredible.  Please someone tell me who gets excited about releases from HP or Dell?  Tons of people eagerly await Apple’s next Mac refresh to see where they will push the envelope next time.  Also, their software continues to rate better than Microsoft.  OS X is just awesome.

When it comes to the iPhone, there still isn’t a worthy competitor.  I have an iPhone and it is truly a device that adds to my quality of life.

As an Apple fan and a shareholder, I’m extremely excited to see the upcoming products from Apple as you can bank on their continuous innovation and development even during a recession.  Don’t forget, they have over $28 billion in cash now to continue to fund innovation and more.

The Platform Advantage

Another huge competitive advantage for Apple is the platform advantage.  What do I mean by this?  I’m referring to the iTunes platform.  The platform that is in almost every household no matter if they have a PC or a Mac.  Their strategy for years has been to infiltrate consumers with free iTunes software to organize and purchase music at a low price, then sell incredible products that work seamlessly with this platform already in place.  The reason the Zune failed, why Amazon’s music store won’t take off and why nobody uses Blackberry’s for music, video, or other media is all because of iTunes and Apple’s platform advantage.

The Stock: AAPL

So, despite the amazing fundamentals of this stock, we’re in a bear market, which means this stock is not likely to see much upside for a while.  Don’t get me wrong, Apple will continue to generate a ton of cash and continue to beef up their product lines during this recession, but you probably won’t see much upside in the near term.

Because they will continue to generate huge amounts of cash and continue to develop superior products, this is a great company to build a position in.  Also, the fact that it seems NOBODY is recognizing how huge the non-GAAP numbers have been, the earnings should continue to blow out estimates each quarter moving forward because of the additional impact of delayed earnings.  Do not, however, buy the stock during rallies like we just saw after the quarter’s numbers came out.  Wait for drops in the stock price to add to your position.  I imagine we’ll have the opportunities such as these to buy AAPL.

3 Comments »

  • Amy said:

    I’m not sure about you but am personally a little hesitant to invest in Apple due to the recent medial issues Steve Jobs is experiencing. He has been the visionary behind Apple from the beginning and I’m not sure how the company would run without him. Do you have any thoughts on that situation?

    In case you’re not familiar with the issue, here is an interesting article in Forbes about it:
    http://www.forbes.com/intelligentinvesting/2009/01/16/intelligent-investing-steve-jobs-apple-panelJan19.html

  • Kevin said:

    It is something to monitor, but Apple’s earnings are safe with or without Jobs for the next few years. Their pipeline is set. Ten years out? Maybe not.

    The only concern I have for Apple is the demise of the U.S. consumer. Consumer spending is likely to drop more and more over the next year, so this could hurt Apple.

  • Gennaro said:

    Innovation and a loyal consumer-base goes a long way 🙂