The Miracle (of Tim Cook), Earnings Chicken, and the Normalcy of Slowing Growth

I apologize in advance…both for this stream-of-consciousness-esque post, and for being unapologetically corny:

I woke up at the moment
When the miracle occurred
Heard some analysts give props the stock deserved

Every point it ever lost
Now has been returned
The most profitable firm I’d ever heard


The Miracle (of Tim Cook) (and the Rest of Apple)

Not so long ago:

More recently:

The miracle isn’t in the turnaround of perception, as I implied (with apologies to U2). Sure, it’s the very definition of a total team effort, but under Tim Cook’s steady stewardship as COO, de facto interim CEO and then formal CEO, Apple has grown:

from a company that turned in a positively adorable (actually, downright miserable) $5.94B revenue number in FY 1998, a sharp drop from FY 1995 revenue of $11.06B,

to, following a few serious bumps along the way, a company making around 40x the revenue of FY 1998; three times the revenue of Google; more than double the revenue of Amazon, Boeing, HP, IBM, and Microsoft; and ringing in several tens of billions more annual revenue than blue-chip heavyweights like AT&T and GE.

As for profit…well, I’ll get into that near the end of this post.

Yes, Tim Cook is a Great CEO. So…uh…why that looming anxiety in the background?

Revisiting the Subject of Earnings Chicken

Part of it is Apple’s flagrant breaking of conventional business laws, even that inapplicable Law of Large Numbers you hear about now and then.

After chugging along on the plateauing end of an S-curve, Apple’s iPhone 6-series looks to propel GAAP revenue and net income (not EPS) by around 30% by the end of FY 2015 – which is certifiably absurd when you consider the FY 2014 compares of $182.8B and $39.51B, respectively. I’m guessing there isn’t a single non-energy company in the history of companies (and there aren’t a ton of companies that out-revenue Apple anyway) that’s ever experienced this level of growth at this scale without a major acquisition.

And I get why management’s enthusiastic. Apple has two blockbuster fiscal quarters left to report this year. The June and September quarters should be excellent by any objective measure, and Apple has a little something to prove to the doubters.

Yet, I’m still bugged for some reason by the lack of even a few sentences from management to pave the way for what I’m guessing is a more “muted” FY 2016.

I know, this is Ultimate Armchair Quarterbacking at its worst. There’s no good reason to pump the brakes on expectations yet. Maybe it’s me who’s getting ahead of things.

And Wall Street remains skeptical about how much longer Apple can keep this up, currently forecasting FY 2016 revenue growth of a “paltry” 5.5% year-on-year.

Wait, is Wall Street skeptical? Here’s the thing. Wall Street analysts typically start out cautious on Apple. But when inundated by enthusiasm, they can exhibit a tendency to, gradually, get, swept, along. Even as “counteracting” notes of concern and bearishness ring out with increasing intensity.

Of course, if you’re a long-term buy-and-holder of Apple – as Tim Cook recommends an AAPL shareholder should be – then there’s probably little reason to worry whether Wall Street or Apple management is a little “intemperate” in terms of financial expectations. They should moderate sometime in calendar 2016, you get “paid to wait” anyway courtesy of the dividend, and AAPL will be valued more or less fairly…with Apple’s analyst-projected 5.5% FY ’16 growth already priced in, assuming global market sentiment is more or less stable…

…right?


It’s Perfectly Normal to Slow Down (in Percentage Terms)…When You’re Probably Gonna Turn in a Fiscal Year Revenue of Over Two Hundred and Thirty Frickin’ Billion Dollars ($230B). How Will, or Should, the Stock React?

There I go again, not burying the lede.

I daresay that those in the know – that realistic subset of Apple independent analysts/sell-side professionals – understand that about 30% revenue and income growth is not a repeatable phenomenon at these ionospheric, unprecedented-for-a-pure-play-tech-company levels. iPhone can’t grow units by 35-40%+ indefinitely, and Apple Watch would need to sell an enormous amount of units at fantastically torrid growth to pick up any slack. (I reserve the right to change my mind depending on future guidance, say FQ1 2016, though my wild guess is I won’t need to.)

As for the media? Call me overly cynical, but I anticipate that when Apple growth does inevitably slow down (again) in percentage terms due to rather unbendable laws of Business Physics, this uncommon-as-of-now concern will become more pervasive:

While I’m kind of in the “earnings zone” so to speak, I might as well throw in a gratuitous two cents or so on the perfectly unremarkable prospect of Apple’s revenue and net income growing…well…less than 25% YOY in fiscal 2016. Maybe a bit less, maybe a lot less, it’s tough to say at this point. Significantly less by fiscal 2018 or 2020 seems like a given.

Sustainability is more than just respecting your customers, the environment and your supply chain/workers therein. It’s also about making the best possible long-term growth choices and bets, and setting up for better years ahead even when outsiders aren’t quite sure what you’re doing (as was the case with Apple’s “margin reset” from about FQ2 2012 to FQ1 2014).

Since Apple’s essentially committed to indefinite dividend increases year after year, I’m assuming Apple’s overall long-term plan is to keep growing year-over-year in as carefully managed a fashion as possible given its remarkable demand seasonality, always-sold-out major new product category launches, and pioneering nature as world’s largest technology company bar none. Which is a muddled way of saying that Apple (aside from the whole staying true to its corporate culture and product/consumer mission deal) wants to continue growing, even if “just” in the mid-to-high single digits, year after year, at least on average.

On that inevitable day when Apple becomes less of a growth story, what to expect out of the stock? No one can say. And everyone remembers October 2012 – April 2013. But at least there’s some indirect reference points (courtesy Yahoo! Finance/Key Statistics section)

GM has a profit margin of 3% and a ttm multiple of 14.26 (as of this writing). Super-revenue-giant Wal-Mart (WMT), with turnover close to half a trillion per year, has a similar profit margin and decidedly non-existent growth, with a ttm P/E of 14.75. IBM has a P/E of 14.38 amidst negative growth. Wells Fargo (WFC), another non-growth story, P/E of 14.17. (Interesting confluences.) HP (HPQ), with more severe negative earnings growth, has a P/E of 12.11.

Turning to growing mature companies, Disney (DIS) has revenue/earnings growth of 10% and under, with a P/E of 25.57. Boeing (BA), 18.38. CVS, 27.

As a bull, I do wonder often about Apple’s maybe-too-sensible price/earnings multiple compared to the market multiples of the NASDAQ 100 (23.39) and S&P 500 (21.24), both of which are weighed down by their Apple component (16.0). I’m pretty well-versed in the bear case – I read permutations of various themes all the time, and I’ve held shares through several bear periods after all. Plus I’ll readily acknowledge the “my, what a big market cap you have” factor.

Still, analysts are expecting ttm EPS to increase from 8.05 by more than 50 cents for FQ3 – meaning that at Friday’s closing price, ttm P/E drops to 15.1, before the iPhone 6S launch quarter…in which analysts will likely expect, given “good enough” guidance, ttm EPS (in this case, full-fiscal-year EPS) to increase another 50 cents or so, making for a ttm P/E of below 14.5 at Friday’s closing price.

That’s right. If you assume AAPL remains unchanged through the FQ4 earnings announcement, the company would be valued in the same cohort as GM, Wal-Mart, IBM and Wells Fargo.

While most likely turning in the highest corporate annual profit of any publicly-traded company (that’s not a government-sponsored enterprise) ever:

Screen Shot 2015-07-18 at 7.58.34 PM

And, if Apple can manage to grow net income over time, it should continue to post new #1 corporate profit years, making it the next ExxonMobil, just far more efficient on a net margin basis.

That…should mean a decent valuation floor when you add in the ongoing capital return program/growing dividend, right? Time will tell. Luckily, Apple leaves this kind of valuation hand-wringing to others, which is probably for the best.


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