Apple Is Definitely Not Going Sour


On Monday afternoon, Apple reported better-than-expected earnings results for it's fiscal fourth quarter of 2013, producing earnings per share of $8.26 and beating the average analyst estimate of $7.96 by 4%. This represented Apple's biggest earnings beat in more than a year.

The company also provided fairly strong revenue guidance for the December quarter, although its gross margin estimate fell short of many analysts' expectations at 36.5%-37.5%. All in all, its Q4 earnings report fully justified the stock's strong run over the past four months.

AAPL Chart
AAPL Chart

Apple six-month stock chart. Data by YCharts.

Apple faced a variety of headwinds in the last year, which held back growth and caused the first year-over-year earnings decline in more than a decade. However, most of these headwinds are moderating. As a result, I expect Apple to return to solid revenue growth and even stronger EPS growth in the next 12 months.

Stemming the decline?
Apple has posted some pretty hefty earnings declines this year, particularly in the March quarter, when EPS dropped nearly 20% year over year. By contrast, EPS declined by less than 5% year over year in the September quarter, as sales growth and the results of Apple's big share buyback program helped offset lower gross margin.

Apple's new iPhone 5s has proven exceptionally popular. Photo: Apple.

Apple posted big growth in iPhone sales last quarter, with unit sales up 26% and revenue up 17% compared to 2012, due to the strong launch of the new iPhone 5s and iPhone 5c smartphones. Meanwhile, Apple's iPad unit sales increased slightly year over year, even though it was fairly well known that the company would introduce new iPads this month.

Apple CFO Peter Oppenheimer stated on the company's earnings call that iPhone and iPad sales both outperformed internal expectations during the quarter. In late September, Apple updated its guidance to reflect that revenue and gross margin would come in near the high end of the original guidance ranges of $34 billion-$37 billion and 36%-37%, respectively. Apple's revenue ultimately exceeded the guidance range, coming in at $37.5 billion, while gross margin reached the top of the range at 37%.

Outperformance ahead
Apple projected that December quarter revenue will be in the range of $55 billion-$58 billion, while gross margin will remain roughly flat sequentially, at 36.5%-37.5%. Prior to the earnings release, the average analyst estimate called for revenue near the bottom of that range. Accordingly, analyst estimates are likely to rise over the next few days. However, I think that Apple's guidance will prove conservative once again.

Last weekend, I argued that Apple could have its first $60 billion quarter this fall. While this implies that revenue will exceed the guidance range by at least 3.5%, I think this is manageable. Apple has beaten its original revenue guidance in two of the last three quarters. Moreover, the December quarter can be particularly volatile because a disproportionate amount of revenue comes in the month leading up to Christmas.

Apple's new iPad Air could drive strong sales gains this quarter. Photo: Apple.

Apple has not even begun to sell its new iPad Air -- arguably the most radical update ever for the full-size iPad -- or the iPad Mini with Retina Display. It also doesn't know how much dropping the original iPad Mini's price to $299 could boost sales. As a result, Apple's guidance may make overly conservative assumptions about iPad sales.

Furthermore, for the iPhone, it's likely that Apple is not assuming that China Mobile will start selling iPhones during the quarter. However, China Mobile is planning to launch its new 4G network next month, and some stores have apparently begun displaying iPhone signage! This could signal a launch as early as next month, which would create big upside for Apple's iPhone revenue in China.

Foolish conclusion
Apple's better-than-expected September quarter results set the stage for a return to earnings growth in the current quarter. While Apple's guidance calls for revenue in a $55 billion-$58 billion range -- which would translate to roughly flat EPS based on its gross margin projection -- I see plenty of upside to those numbers. Indeed, it has a good chance of generating more than $60 billion in quarterly sales for the first time ever, which would reignite earnings growth.

Moreover, Apple is not likely to fade after the December quarter. On Monday's earnings call, CEO Tim Cook repeated that Apple expects to enter at least one new product category by the end of next year. It may also offer a larger-screen phone next year, providing another choice for its customers.

These initiatives will further improve Apple's already-strong product portfolio, making earnings acceleration a very realistic goal for 2014. Apple shareholders should sit back, relax, and enjoy the ride.

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Fool contributor Adam Levine-Weinberg owns shares of Apple and is long January 2015 $390 calls on Apple. The Motley Fool recommends and owns shares of Apple. It also owns shares of China Mobile. 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.

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Originally published