Another Apple Blowout

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Apple reported another quarter of stunning results. Not quite as good as the December quarter but still something to behold. Revenues of $39.2 billion exceeded consensus by about $5 billion. EPS of $12.30 compared to a consensus estimate of $10.04. These results also exceeded the “whisper” numbers which were 10-15% above consensus.
Apple’s great numbers came against a backdrop of sudden worries about the stock and the business outlook. Those worries were likely exacerbated by the 50% up move in the shares into the early April peak. Including the day of the report Apple had fallen 12% in ten days with only one up day in the last ten.
Concern arose around the number of iPhones sold due to slightly worse than expected iPhone sales at Verizon and AT&T which reported before Apple (as they do every quarter). An equal worry was whether AT&T and Verizon would subsidize iPhone purchases to a lesser amount and tighten upgrade policies. Apple gets over $600 per iPhone from the carriers which sell them to consumers for $200 along with a 2 year contract guaranteeing 24 months of expensive monthly data plans. Verizon and AT&T have tightened upgrade policies which could slow demand for iPhones as many users upgrade every new generation. Any reduction in the subsidy could further reduce iPhone sales by raising the price to consumers.
At least for this quarter, these issues proved meaningless. iPhone sales soared past estimates driven by Chinese and other Asian demand. Apple’s growth story is increasingly overseas, something analysts over focused on the US had forgotten. iPad demand met expectations, while Macs were a little light. The mix shift toward iPhones, falling commodity costs, and some one-time benefits sent gross margin surging to all-time record.
The shares bounced back strongly after the report, regaining about 2/3rd’s of the recent losses. I think this quarter justifies Apple trading as high as $750-800 later this year based on 12 times calendar 2012 EPS of about $50 plus what will be around $140 in cash by year end. However, after the big run in the shares this year and with no obvious new catalyst until the fall launch of iPhone 5 (and possibly a smaller iPad and TV), I think the shares could stall in $600-$640 range for awhile. The Street is going to be concerned about slowing earnings momentum and a pause in iPhone sales ahead of iPhone 5 similar to early last fall ahead of the 4s launch. I suspect iPads will beat expectations over the next few quarters driven by education demand and broader geographic distribution. A refresh of the Mac line early this summer also could provide some upside.
The bottom line is the Apple story is not over yet although the stock could stall for a few months or even until fall. Let’s not forget how far it has come this year. I long thought the market was significantly undervaluing Apple. The move this year leaves the stock just normally undervalued. This situation requires fresh catalysts. I expect them later this year.
Disclosure: Apple is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Northlake is an Illinois registered investment advisor. Filings can be found at www.sec.gov. Apple is a net long position in the Entermedia Funds. Steve is co-portfolio manager of Entermedia, owns a stake inthe Funds’ investment management company, and has personal monies invested in the Funds.

EMC: Mostly In Line But Lacking Pizzazz

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I alwasy have viewed EMC as a core holding. I am not expecting Apple or Google or Facebook or Qualcomm. Just nice steady growth with very high visibility and consistency. EMC’s storage products and solutions are absolutely critical to the world of internet based computing, communication, and entertainment. Storage is a high priority, mission critical purchase for EMC’s customers, gaining share of IT budgets and outgrowing spending on most core technology products and services.
EMC’s latest quarter supported this view. EPS of 37 cents was a penny better than expected while revenues of $4.04 billion fell about $50 million short of consensus. Margins were better than expected. Management stated it would “meet or exceed” prior EPS guidance for 2012. Wall Street greeted these results with a sell-off. The stock is down about 4%. The stock has done very well this year after a weak finish in 2011. Recent street research was expecting a stronger report based on channel checks and apparent business momentum.
Despite the Street’s disappointment, nothing in the report, guidance, or management commentary suggests any meaningful change in the outlook. Revenues grew 11% and EPS were up 19%. The balance remains extremely strong and free cash flow in 2012 should approach $5 billion. Backing out the public stock market value of EMC’s majority interest in high flying VMWare (revenue up 25% last quarter) and the company’s $6 billion of cash and the stock trades about 10 times earnings. I think that is way too cheap for a company targeting at least 13% annual growth in revenue and EPS from 2010 through 2014. Furthermore, as previously noted, EMC’s outlook seems quite secure giving the importance of storage to current information and communications technology trends.
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, a registered investment advisor.

Qualcomm: Good Quarter, Fuzzy Guidance

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Qualcomm (QCOM) exceeded its own guidance and analyst estimates with its March quarter results.
Sales grew 28% and net income was up 21% indicating the underlying strength for QCOM’s technology and chips. Despite the strong quarter, the stock is down 5% today because the company guided revenues, earnings, and chip shipments slightly below consensus for the June quarter. I think the street expected guidance at least in line with the street, probably even a little higher.
Management attributed the disappointing guidance to supply constraints. The company is unable to provide as many chips as its customers are demanding due to capacity shortfalls at QCOM’s own suppliers. Against aggressive and repeated questioning from analysts, management repeated again and again that there was no demand issue. Nevertheless, there appeared to be an inconsistency between management comments and the guidance such that loss of market share or weakness in some product lines could be an issue. Toward the end of the call, management reminded listeners that a similar guidance issue occurred when the company reported in October 2011 and shipments ended up OK. This comment and management’s inability to foot the figures being put forth by analysts suggests the real issue here could just be conservative guidance due to the supply issues. I suspect that in the end QCOM will beat its June quarter guidance.
While the stock is down today and may face headwinds until more clarity on the June and September quarters appears, I saw nothing in the report, guidance, or management comments that changes my very bullish thesis on QCOM over the next year or two. QCOM is benefiting from the boom in smartphones and the upgrade cycle to 3G and 4G throughout the world. The company has made a big bet on Apple but wins if almost any vendor produces top selling phones (one thing that could be happening with the guidance is a shift toward Apple when iPhone5 is still six months away). QCOM also should see a huge boost in the addressable for its chips as technology for next generation PC chips has shifted such that QCOM could be a meaningful supplier in a market it has never penetrated.
I plan to stay patient with Northlake’s current holdings in QCOM and would add to positions on meaningful weakness below this morning’s trading levels. Sometimes sticking with the big picture and long-term theme is necessary even amid shot-term challenges. In the case of QCOM, the investment thesis is intact, so staying the course makes sense.
Disclosure: Qualcomm and Apple are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, a registered investment advisor. Qualcomm and apple are net long positions in the Entermedia Funds. 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 Looks Fine but Street Votes No

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Despite Google (GOOG) stock getting a drubbing today I am more comfortable with the shares than I was before the earnings report last night. The report was largely in line. Revenues were as expected/ EPS upside was from tax rate and good expense control that juiced margins. I think expenses are a little lumpy at Google so I would not say all is clear on margins but this is still good news. The tax rate also fluctuates so I would not call this a low quality beat either. The volume of searches was much better than expected but the price paid by an advertiser per clicked search fell 12%. This reignited the debate over the health of the underlying business. The shift to mobile computing via smartphones and tablets is driving search volume to mobile where advertising prices are currently lower.
Despite today’s stock action, I think the Cost Per Click debate moved in favor of the bulls this quarter. The worry is that mobile clicks will never see rising prices. I think that is the result of weak mobile pricing elsewhere in internet display advertsing. I understand that but I think search has proved different on the desktop and will do the same in mobile. I come at this from a traditional media perspective and I think volume and price will follow eyeballs over time as long as search maintains a high ROI for advertisers (just like national TV does). I think that should be the case for mobile. I get the worry about competition for mobile search from apps and e-commerce sites but I think a similar bullish argument can be made that search is even more valuable in a mobile environment as consumers are even closer to point of purchase than on the desktop.
Bottom line. The quarter is good enough. This too shall pass. Google shares overdue for a catch up move to the market and will reach $750 in 2012.
Disclosure: Google is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, an Illinois-registered investment advisor. Filings can be found at www.SEC.gov. Google is a net long position in the Entermedia Funds. Steve is co-portfolio of Entermedia, a long/short equity hedge fund focused on media, entertainment, communications, and related technologies. Steve owns a stake in Entermedia’s investment management company and has personal monies invested in the Funds.

Back to Mid Cap for April

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For the month of April, Northlake’s Market Cap signals switched from favoring small cap to favoring mid cap. As a result, client positions in the Russell 2000 (IWM) have been swapped into the S&P 400 Mid Cap (MDY). The Style model remains on a growth signal so client positions in the Russell 1000 Growth (IWF) will be maintained for at least another month.
The shift from small to mid cap is the result of a combination of factors. As mentioned in prior updates, the small cap signal was relatively weak for both months it was in place. A small shift in the underlying model factors could easily shift it back to mid cap. This is exactly what happened as the technical and trend indicators favoring small cap weakened and the uptick in interest rates this past month is a negative for relative performance of small caps. The technical and trend indicators reflect that small cap stocks very slightly lagged large cap the past of couple of months. Interest rates are pretty straightforward. Small companies have less access to credit as a general rule so any uptick in interest rates, even from very low levels, tends to focus investors toward larger companies unaffected by possibly tighter credit conditions.
During March, the models put in a mixed performance. The small cap signal neither added nor subtracted value as the Russell 2000 and S&P 500 each rose a little over 3%. The growth signal continued to perform well as IWF rose 3% ahead of the 2.5% gain for the comparable value index. For the quarter, the story was much the same as the Market Cap model produced a return in line with the S&P 500, while the growth model beat the S&P 500 and the value index. Growth is benefitting from superior performance of technology stocks over the past few months.
Disclosure: MDY is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. IWM is a core holding in select accounts at Northlake Capital Management, LLC. Steve is sole proprietor of Northlake, a registered investment advisor with the Illinois Securities Department. IWM is a short hedge in the Entermedia Funds. Steve Birenberg is co-portfolio manager of the Entermedia Funds, owns a stake in the Funds investment management company, and has personal monies invested in the Funds.