Breakout

Apple Earnings on Deck: How the World’s Largest Company Can Still Surprise to the Upside

Jeff Macke
Breakout

Apple (AAPL) reports earnings results for their fiscal fourth quarter today after the market close, providing a much needed reprieve from the uncertainty surrounding the calls of other, generally lesser, companies. The estimates are for revenues of $29.5 billion and EPS $7.34 share, increases of 45% and 58%, respectively. These numbers would be impressive for a young company. Considering Apple has the largest market cap of any company on earth, this growth is almost surreal.

Implausible or not Apple always beats estimates; and always isn't really an exaggeration here. Topping estimates for this quarter would amount to 30 consecutive better-than-expected reports, a trend Roger Kay of Endpoint Technologies tells me isn't likely to change.

"Apple typically gives very low-ball guidance, then the pro analysts on Wall Street try to figure out how much higher it's really going to be," Kay says, laying out Apple's reporting magic. "Then the amateurs come in and raise them a little bit, kind of like a poker game," he explains. "Finally (Apple) really reports numbers and it's beyond even that."

The streak has to stop at some point, which is precisely what people have been saying for at least five years. It's also the reason Apple trades at only the same multiple as the stock market as a whole.

What's going to stop the growth? If not competition than simply the law of large numbers, says Kay. "They can't become bigger than the universe."

For the record, if you value the entire universe at a reasonable $20 trillion, and Apple's growth rate stays at 45%, the company will hit the ultimate growth ceiling in 11 years, at current multiples.

In the here and now Kay says this is the last quarter of the Steve Jobs era. Kay says today marks the real start of Tim Cook's reign. The question, says Kay, is "what can he say to make people feel good about the future?" So far, so good, judging by the strength of the iPhone 4S roll-out.

Kay isn't sweating the enterprise business. He says Apple's growth in enterprise is something resembling organic. "Where IBM (IBM) and other suppliers like HP (HPQ) and Oracle (ORCL) basically sell to enterprise... Apple essentially sells single units to individuals who then bring them into enterprises and tell their IT managers 'hey, support this for me.'"

We know Apple is going to beat and the company doesn't announce new product plans on earnings calls. So what's the answer to Kay's question about Cook making investors optimistic, or at least more optimistic than normal?

For starters the company can announce a replacement for the second most important executive to leave Apple this year, if not ever. The exec in question is Ron Johnson, the retail visionary who worked hand-in-hand with Steve Jobs to create Apple's retail stores. Johnson is leaving Apple to become CEO of JC Penney (JCP), effective November 1st. Apple has yet to announce a replacement, despite using a top search firm and looking literally all over the world.

Apple has more than 350 retail stores located across the globe. Like everything else about Apple, the numbers are stunning. On average each store sees 718,000 visitors per year, implying about a quarter of a billion shoppers annually. The sales per square foot are estimated to be over $5,600. The second highest chain in retail is Tiffany & Co. (TIF) at under $3,000 per foot and growing the number at a rate 1/5th that of Apple.

Maybe it's because I grew up in stores, but as far as I'm concerned, replacing Johnson should be Cook's absolute top priority. The retail locations are a customer's only hands-on experience with Apple. The stores make the impression that carries through to the rest of the company. Screw up that magic and you wreck the brilliance of Apple in many ways. That's why Ron Johnson reported directly to Steve Jobs; because Jobs knew just how important controlling the customer experience is.

An earnings beat is assumed. The only upside surprise Cook has available is replacing Johnson with a merchant king. If Cook can pull it off he will have won the support of at least one shareholder: Me.

Let us know your thoughts on Apple, their continued earnings success, and what upside surprise you're hoping for in the comment section below.

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