Apple: 'Absolute monster quarter'

by Geoffrey Seiler, editor BullMarket.com

Apple (AAPL) has returned to its winning ways, reporting that it had more than doubled its profit and totally blowing away sales expectations for the iPhone, iPad, and Mac line of computers.

Revenue surged by 73% year over year. It was an absolute monster quarter. The results easily outdistanced the already heady expectations for holiday sales.

The company sold 37.04 million iPhones around the world, up 128% from a year ago. It sold 15.43 million iPads, 111% better than the year-earlier period.

The Macintosh also outstripped expectations as Apple sold a quarterly record 5.2 million of the computers, which was 26% better than last year and ahead of the 5 million Wall Street was looking for.    

Gross margin also smashed expectations at 44.7% for the quarter compared with 38.5% a year ago. Wall Street's gross margin consensus was 40.7%.

The company guided for Q1 sales of $32.5 billion, compared to $24.7 billion last year, and EPS of about $8.50 per share. It guided for gross margins of around 42%, reflecting approximately $60 million in stock-based compensation.

Famous for its conservative guidance, Apple's projection was still ahead of the Wall Street consensus estimates of $32.1 billion in sales and $8.04 per share in net income.

Combining iPhone, iPad and iPod touch, Apple surpassed 315 million cumulative iOS-based device sales, selling more than 62 million in the December quarter.

Apple's retail stores, meanwhile, generated $6.1 billion in revenue, up 59% from last year. The company opened four new stores during the quarter, including a showcase store in New York's Grand Central Station.

The other three were in Europe. With an average of 358 stores opened, average revenue per store was $17.1 million compared to $12.0 million in the year-ago quarter, an increase of 43%, the company said.

The company's huge quarter generated $16.2 billion in free cash flow and left it with a mind-boggling $97.6 billion in cash on the books, equal to $104 per share.

The huge cash horde is likely to increase pressure on the company's board to return some of that cash to shareholders through a dividend, buybacks, or some type of growth-oriented acquisition.

There is nothing else to say except to acknowledge that this was an absolute blowout of a quarter, but here's something to ponder: Apple could have sold even more iPhones had it made enough of them.

Despite planning for a big sales gain for the iPhone 4S, management acknowledged the surge in demand outstripped its most-optimistic projections.

Despite some initial criticism for not being "new" enough, people clearly like features like the Siri voice-recognition system and the internal improvements like a faster processor and better camera. iPhone is also now available through all three of the major U.S. cellular carriers.

Apple also did something it almost never does and that was to guide above the consensus. We'd wager its guidance is still conservative, but we'd be hard-pressed to find someone to take the bet.

Several analysts suggested the company's guidance implies a March refresh of the iPad, possibly even an iPad 3. The company never pre-announces products, however. Remember as well that the iPhone 4S was just introduced into China this month.

Despite its astronomical gain, the stock still remains one of our favorites going forward given its solid growth opportunities despite its huge size given that its market share is still relatively low in the rapidly growing smartphone and PC markets and it is still expanding its penetration overseas.

Bottom line, we could make a legitimate case that Apple's shares should be trading at $1,000 per share, which is about a 22.5x multiple on the $40 per share in EPS it is projected to generate in FY13 plus adding back its over $100 per share in cash.

Given its size that might be a bit of a stretch, but when looking at its growth rate and cash flow generation it certainly isn't. That said, we're going to raise our target from $550 to $650, which is a modest 14x multiple excluding its cash.

Learn more about this financial newsletter at Geoffrey Seiler's BullMarket.com.