Another Blowout from Apple Supports Mobile Broadband Theme

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Apple continues to amaze. Relative to expectations this is one of the best quarters I ever remember by any company. Damn, I am pretty certain I wrote that about Apple previously! In calendar 2011, Apple earned $35 a share. Guidance for the March quarter is up 32% and is probably conservative. The company could earn $45 per share in 2012. By the end of the year, cash per share will be near $130-140. Subtract that from this morning’s price of $450 and you get $320 and you still have an absurdly cheap stock at 7-8 times earnings. $500-600 is a very reasonable 2012 target for the shares.
The story at Apple is iOS. 37 million iPhones. 15 million iPads. 15 million iPods that are mostly touches. iOS is mobile broadband. It defines and leads the experience. Even if this growth came somewhat at the expense of Android last quarter, Apple’s health is the greatest testament to the mobile wireless broadband theme.
Mobile broadband is a key theme for Northlake’s individual stock selection. Recent purchases of Qualcomm (QCOM) and EMC Corporation (EMC) play right into this mobile broadband. QCOM chips power many high end smartphones, including from Apple. EMC data storage solutions enable smartphones, tablets, and laptops to access massive databases of content, information, and applications.
For more analysis on Apple’s latest earnings belo the Twitter comments I posted live during the conference call. The tweets are listed in chronological order from the start of the call to the end.
AAPL amazes again. EPS headed toward $45 for calendar year 2012. By this time next year AAPL has $140 in cash. 10X $45 EPS is $450+$140=$590. Still way too cheap.
Everything good. Even the supposedly dying desktop. iOS devices a total blowout. New iPad and iPhone 5 still to come this yr.
Guidance seems to imply 43% gross mgn, down 170 basis points. if iPad3 ships total guidance will be too low again as usual.
Inventories look good coming into March Q. iPhone below target. IPad in line. Adds visibility to guidance.
Guidance in line with Street on rev, better on EPS. For AAPL that is a guide up. Rare occurrence. Good old fashioned beat and raise.
$AAPL Starting Q&A. Looking for iPhone color on units guidance. Seems 20-25 million based on my spreadsheet. China just shipping 4S this Q.
“actively discussing uses of cash” Cook differs from Jobs here. Expect buyback or dividend this year me thinks. Another +.$AAPL China” “demand there has been staggering.” No China shipments in Dec Q? That is what he said I think. If so, guidance gone be low.
positive comments on components. Supply > demand. Explains gross mgn guidance. Still down 270 bps seq on US$, one times, sales lev.
Half Dec Q gross mgn upside one time in nature. Sales lev and mix shift toward iPhone for rest. Makes gross mgn guidance impressive.
See iPad as different product category from Kindle. Multifunction vs. Limited Function.
Good Q on seq decline in gross mgn guide. Last 3 yrs was up 200 bps. With mgt explanation implies flattish. Could be source of upside.
Lots of questions about cash balance plans. Supply chain, acquisitions, and “otherwise.”
85 million signed up for iCloud so far. Very important as “strategy for next decade.”
130,000 points of sale for iPhone. “Nothing to announce today” on China expansion. China extremely important. Implies to expect more.
seq rev guidance: 1. extra week in Dec 2. has Xmas-NY week last yr 3. increased iPhone inventory yr ago 4. 4S channel fill 5. US $
acquisition strategy: bring in talent, engineering, technology. Seems to rule out large deal.
Good q on refresh rates. Accelerating? In Enterprise one product pulling others but Q is for consumers not skipping generation.
Call over. Stk hitting high while call occurs. Well deserved. $600 not a stretch for 2012. $500 should be now. Valuation crazy low.
Disclosure: Google, Apple, Qualcomm, and EMC are net long positions in the Entermedia Funds. Texas Instruments is a net short position in the Entermedia Funds. The Entermedia Funds are long/short equity hedge funds focused on media, entertainment, communications, and related technologies. Steve Birenberg is co-portfolio manager of Entermedia, owns a stake in Entermedia’s investment management company, and has personal monies invested in the Funds. Google, Apple, Qualcomm, and EMC are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, an SEC registered investment advisor.

Strong Quarter for EMC Justifies Growth Story

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EMC Corporation (EMC) reported better than expected 4Q11 results. Revenues of $5.57 billion and EPS of 49 cents exceeded consensus estimates of $5.49 billion and 46 cents, respectively. The company provided detailed 2012 guidance in line with street estimates. Revenues are forecast at $22 billion, up 10%, with EPS forecast at $1.70, up 13%. Given plenty of headwinds (Thailand floods, Europe economy, currency, assumed big slowdown in share buybacks), the guidance is quite solid. In fact, it looks conservative coming off much higher revenue growth and share repurchases in 4Q11 and 2011.
The latest results are the second consecutive quarter where EMC exceeded expectations while facing a skeptical street and lots of headwinds to the business. I think this suggests that EMC’s core story as a play on Big Data and Cloud is intact. Given the high priority of spending on storage and virtualization, this consistent execution should result in a higher multiple for the shares.
EMC enjoyed strength across most its business lines. Large enterprises continue to spend on storage despite a generally tepid overall IT spending environment. EMC is seeing accelerating growth in small and midsize companies, a sign that complex storage needs are growing and EMC’s total addressable market is broadening.
EMC trades at just 14 times earnings unadjusted for its large cash balance and 80% ownership in VMWare (VMW). VMW also reported outstanding earnings and its shares are enjoying a 7% pop so far this morning. EMC trades at single digit multiple on its core business, much too low for what is likely to be sustained mid-teens growth. A price of $28-30 seems reasonable.
Disclosure: EMC is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, an SEC registered investment advisor.

Google in the Penalty Box. For Now.

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Two minute minor, five minute major, ten minute misconduct, or game misconduct?
I’m thinking ten minute misconduct. The quarter is not nearly as bad as the stock would suggest. Revenues were light but operating income, EBITDA, and free cash flow were in line with expectations. Operating margins, a big issue over the past year, were actually better than expected. Adding back some forex hedging, a Clearwire write-off, and a higher than expected tax rate and EPS would have been in line with expectations.
But apologies don’t work here. In line numbers are not good enough for Google (GOOG). A top line miss raises issues as despite the low P-E, GOOG is a growth stock. Growth and revenue misses are not compatible.
Lots of analysts ascribe much of the revenue miss to forex but I don’t buy that as these same analysts assumed forex would hurt in their models.
The real issue is Cost Per Click (the price of a search ad) fell 8% in the quarter, more than offsetting much better than expected 34% volume growth of search ads (paid clicks). Paid clicks were expected to rise 24% and cost per click was expected to rise 4%.
The volume surge was led by a shift to mobile and emerging markets and new search algorithms that improved the relevancy of search results. The issue is that these newer searches are priced lower. The question is whether pricing in these areas will eventually rise, and if so, how soon. Furthermore, will volumes maintain their higher trend or will they settle back before pricing improves. In other words, is the core search business mature such that driving growth is possible but only at the cost of lower pricing?
I suspect eventually we will learn that pricing in mobile and emerging markets will improve with volumes continuing to run above current expectations. The world is going mobile. Think smartphones, tablets, and ultrabooks. Advertisers will follow and bid up pricing because that is where the eyeballs are going. However, this thesis is going to take time to prove. At least one quarter, maybe two. And in those same quarters, GOOG will close the Motorola acquisition, which creates another headwind. Thus, this official in putting GOOG in the penalty box with a ten minute misconduct.
But let’s not get too negative. GOOG trades at 11 times earnings adjusting for $136 in balance sheet cash. The missed quarter saw 25% revenue growth and greater than 20% operating income growth. Microsoft and IBM are trading sharply higher today on mid to upper single digit revenue growth reported last night. IBM trades at the same multiple as Google. Microsoft trades lower but not hugely so. GOOG offers 20% growth for half the multiple. Sounds cheap to me.
If Google can print a better quarter or two, the shares can regain today’s losses and then some. This is what I expect so I am holding Northlake’s Google position. If the shares head to the mid $500s, I would add to current positions. Whether it goes there before going higher is a guess.
While we wait, expect intense focus on search trends, particularly search ad pricing. There are lots of datapoints here on a monthly basis. But that is all noise and the big move in the shares is unlikely to come before the next earnings report, 90 days from now.
Disclosure: GOOG is widely held by clients of Northlake Capital Management, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, an SEC registered investment advisor. GOOG is a net long position in the Entermedia Funds. The Entermedia Funds are long/short equity hedge funds focused on media, communications, and related technologies. Steve is co-portfolio manager of Entermedia, owns a stake in Entermedia’s investment management company, has personal monies invested in the Funds.

2012 Starts at Mid Cap and Growth

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Northlake’s Market Cap and Style models begin 2012 as they ended 2011, favoring Mid Cap and Growth. Both themes struggled in December but underlying factors in the models remain in place. As a result of the latest signals, Northlake clients invested in the models will continue to own the S&P 400 Mid Cap (MDY) and the Russell 1000 Growth (IWF).
The Mid Cap signal remained in placed despite some changes to factors underlying the model. The recent upturn in consumer confidence shifted that indicator in favor of small caps. Also shifting toward small caps was the U.S. dollar indicator. Dollar strength presents a headwind for large caps, although this factor is not unusually strong. On the other hand, the year end market surge was led by large caps shifting the trend and technical indicators toward large caps. Overall, balance remains between indicators favoring large cap and those favoring small caps, so the model remains in mid cap mode.
There were no changes to the signals from the indicators underlying the Style model. The model remains firmly in growth territory.
Both models struggled in December, producing barley negative returns against a gain of almost 1% for the S&P 500. There is no obvious explanation for the poor performance of mid cap, especially since small cap was unchanged. The two are normally well correlated. Growth lagged due a weak month for technology stocks. The technology dominated NASDAQ fell close to 1% last month due to worries about the lingering impact of floods in Thailand on supply of critical components. Concern over demand also rose, fueled by a disappointing earnings report from Oracle.
For 2011, both models produced disappointing results, declining approximately 2.5%. The Market Cap model was in mid cap mode almost all year and its return tracked the S&P 400 Mid Cap index. The Style model favored value until the fall when it switched to growth. The switch was timely until December when tech stocks fell and took a took a big bite out of growth.
Disclosure: MDY and IWF are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, and SEC registered investment advisor.