Is the Sky REALLY Falling for Apple? Analysts Find the Glass is 5% Empty

Analysts and media pundits would have you believe that Apple’s stock collapse is due to huge underlying problems at the company, and that these problems are causing it to lose share, stop growing, and see a collapse in its margin. Moreover, they’ve expressed frustration that Apple has refused to release its cash hoard in any meaningful way to shareholders, and it should start introducing products such as a low-cost (and low margin) iPhone purely to protect and grow share.

These criticisms are often wrong, and certainly misguided.

For example, after three months of speculation that Apple’s top line revenue growth had stuttered due to “supply chain checks” by analysts, Apple released its results this week for the March 31^st quarter:

• Record revenue of $43.6 Billion – highest ever for this quarter
• EPS of $10.09, beating consensus profit estimates of $10.00
• iPhone volume growing from 35.1 million to 37.4 million (up 7%)
• iPad volume growing from 11.8 million to 19.5 million (up 65%)
• Mac volume flat in a market where the industry declined 14%, although Mac revenues were up 7%
• iTunes/Software/Services revenue growing from $3.1 billion to $4.1 billion (up 30%)

And if all that good news wasn’t enough, Apple announced it was doubling down on returning cash to shareholders -- including promising to return $100 billion to shareholders by 2015:

• Apple announced it will be raising its quarterly dividend 15% to $3.05 per share. That translates to a 3% yield which is 50% higher than the yield on the S&P 500.
• The $60 billion share repurchase is the largest buyback in the history of the world. At Apple’s current price a $60 billion buyback would sop up nearly 148 million shares, or nearly 15% of current shares outstanding.

But rather than rejoice, analysts shrugged their shoulders, lowered their earnings targets, and the stock hardly moved. HUH?

So just to set the record straight, here is the “95% full” story on Apple, since you are unlikely to see the facts anywhere else in this biased world of “only bad news on Apple makes headlines”:

• Four times as many iPhone users switched from an Android phone than to an Android phone in the fourth quarter (per Apple)
• iPhone leads in JD Powers customer satisfaction poll for 9^th straight year
• In March 2013, 70% of iPhone owners were “very satisfied” compared to second place Samsung’s 54%. Another 12% of iPhone users were dissatisfied with IOS but plan to stick with iPhone on their next purchase because of the ecosystems. That’s extremely sticky in terms of Intent to repurchase (per ChangeWave)
• In Q4-2012 Apple captured 72% of mobile phone industry profit with only 7% of the market. This is up from 69% for all of 2012 (per Canaccord Genuity)
• In Q4-2012 Apple captured 45% of the worldwide PC industry profit with only 5% of the market (per Asymco)
• In Q1-2013 Apple’s app store generated 2.6 times as much revenue as Google Play Store on roughly the same download volume (per App Annie)
• In Q1-2013 Apple had 40% of app downloads but generating 74% of app revenue (per Canalysis)
• In Q1-2013 Apple IOS captured 45% of mobile ad traffic and 49% of mobile ad revenue (per Opera Media Works)
• In March 2013 Apple IOS had 62% of mobile browsing (per NetMarketShare)
• In March 2013, Apple had 81.9% of US /Canadian tablet web traffic (per Chitika)
• For 2012, iTunes captured 63% of paid music industry downloads and 80% of digital music purchasers used iTunes (per NPD)
• Market growth remains robust in phones and tablets. IDC expects the smartphone market to double between 2012 and 2016 to 1.4 billion units annually. Gartner thinks tablets are growing even faster, from 125 million units in 2012 to 325 million in 2016
• During 2012 Apple was responsible for one out over every five dollars spent on consumer electronics in the U.S. Specifically, Apple captured 19.9% of the dollars, compared to 17.3% in 2011. Second place went to Samsung at 9.3% in 2012 (per NPD)

So how fair is the current valuation? Apple is trading for about 9 times earnings and 7 times earnings after backing out their cash. This compares to 18 times earnings for the S&P 500.  Apple is in two fast growing markets (smartphones and tablets) with the dominant product in each and is holding its own.  Yes, margins are lower than they were last year, but Apple still makes 72% of the phone industry profit and 45% of the PC industry profit.  The sky is not falling, and the current valuation just does not make sense.

Disclosure: I’ve owned Apple shares since 1985