Breaking Down Apple by Throwing Out the Analysts


Apple's (NAS: AAPL) a witch... burn it!

You'd think the house was on fire, or that the foundation was crumbling from right underneath Apple's feet based on the way investors are talking about its "disappointing" fourth-quarter results and lackluster first-quarter guidance. But, somehow I feel we've been down this road before.

As I recall, numerous things were supposed to slow Apple down or halt it completely in its tracks over the years. Research In Motion's (NAS: RIMM) BlackBerry devices did an admirable job for a few years, but its lack of innovation ultimately cost the company nearly all of its smartphone market share -- and both founding CEOs their jobs.

Nokia (NYS: NOK) , the king of handsets for years, lost its crown recently because of its reliance on out-of-date 2G handsets and its inability to develop its own operating system. Now partnered with Microsoft (NAS: MSFT) , which developed the new OS for the Lumia, Nokia at least has a shot at recouping some of its lost market share, but it's way behind the competition, and Microsoft doesn't exactly have a successful record in the handset market.

Even Google (NAS: GOOG) , whose Android OS dominates the smartphone market and is found across multiple brands, can't seem to get its OS onto a phone with half as much clout as the Apple iPhone. The iPhone alone held 33.4% of all smartphone market share versus Android's 52.2% as of the end of July.

Where's the fire?
So I ask again: Where's the fire?

Sure, this wasn't Apple's best quarter by any means. Fourth-quarter earnings missed the mark by $0.08 and the company's tepid guidance for the first quarter (Christmas season) called for only $11.75 in EPS versus the current consensus of $15.49. But, we've been here before as well.

Apple is notorious for low-balling its expectations for the upcoming quarter, so much so that analysts have generally ignored Apple's estimates for the past couple of quarters. Perhaps it has missed earnings estimates a few times recently, but go back five or six years, and it's nothing but "Apple surpasses Wall Street's estimates" over and over.

Therein lies the real problem of what's wrong with Apple: the analysts that are trying to cover it. Many of the analysts covering Apple have sensationalized the company so much that if revenue grows by "only" 27% we should burn it at the stake!

Breaking down Apple
Instead, I have a more interesting exercise we can look at today that'll break Apple down the right way and remove all of that Wall Street sensationalism. Let's simply take a look at Apple's same-quarter year-over-year results for some of their various products, and I'll think that will do all the talking. Please note, I made the decision to leave out iPod unit sales as they aren't as crucial to Apple's future success.

Source: Apple Quarterly Reports, total units sold in millions.

As you can see from the iPhone sales above, there really isn't much to be concerned about. Sales have been up year over year in every quarter, and the recently released iPhone 5 completely sold out over the first weekend. The last time I checked, selling your entire product supply is a good thing.

Perhaps it's Mac sales that have Wall Street concerned...

Source: Apple Quarterly Reports, total units sold in millions.

Wait... I think I see the smoking gun! Could it be that microscopic drop in second-quarter Mac sales from 2008 going into 2009? No, that's not it either. Keep in mind that Apple Macs are being cannibalized by sales of the iPad and have dealt with the first industrywide downturn in PC sales since 2001 -- and they still grew!

Maybe the smoking gun we're looking for is in iPad sales?

Source: Apple Quarterly Reports, total units sold in millions.

As you can see, iPad sales have only been contributing to Apple's bottom line for 10 full quarters, but growth of the tablets has been phenomenal. Don't let Wall Street sensationalize you into thinking Apple's 14 million iPads sold in the fourth quarter wasn't amazing, because it represented 26% growth in unit sales over the year-ago quarter.

So if it's not Apple's unit sales that are the problem, maybe it's the cash?

Source: Apple Annual Reports.

Yeah, it's probably not Apple's growing cash hoard, either. Apple has tacked on an additional $87 billion in cash in just the past three years and is now sitting on a ridiculous $121.3 billion in cash, on top of paying out $2.65 per share in dividends each quarter.

What we learned
We learned that analysts don't have a really good understanding of Apple based on its past performance. Apple is always at the leading edge of innovation, and its products drive an almost cult-like following of customers. Forget analyst estimates and the Wall Street sensationalism and focus on the fact that Apple's products have grown unabated year over year and should continue to do so at an impressive rate -- especially with many of its core products recently revamped and with the introduction of the iPad Mini. Simply put, a broken-down Apple looks like an even better value than I originally thought.

If you want more information about Apple without all of that Wall Street sensationalism, then also be sure to grab your copy of our latest premium research report on Apple. Packed with in-depth and unbiased analysis on the opportunities and threats facing Apple -- and complete with a year of regular updates -- this report will give you the right tools you need to make smart long-term investing decisions. Click here to get your copy.

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Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Motley Fool owns shares of Apple, Microsoft, and Google. Motley Fool newsletter services have recommended buying shares of Apple and Google, as well as creating a bull call spread position in Apple, and a synthetic covered call position in Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that loves humor but avoids sensationalism.

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