Final estimates of fiscal 4Q 2017

Since the market closed on Friday at $ 164.05, the AAPL has been trading 15.1x more times according to my EPS estimate for the next twelve months (12.0x if I exclude the next 12 million net cash and giant).

I decided to challenge myself by publishing my final estimates almost two months instead of the usual two weeks before the report because events in these two months (introduction, launch, ramp and report) seem to be some of the most influential for Apple over the years, with significant details like precise launch times , product pricing, receipt and stock adequacy, all of which helped in a correct assessment of the last few days of fiscal 2017, the initial form of the inspired supercycle 2018 and the first insight into that kind of difficult 2019 comparison arguments that will inevitably appear as soon as guidelines are given for the first trimester (in fact, this has already happened).

It may seem counterproductive to try to estimate before all the critical events and information have passed and that can be digested and distilled into my model. Why not just do the usual and turn it all on in mid-October? Waiting would pose absolutely no risk to the accuracy of my final estimates. On the contrary, an early exit leaves the prognosis at the mercy of some of my most subjective, perhaps some conservative, others more hopeful, and perhaps even a few tense assumptions. Like, what if the launch is the last two days of the fourth quarter, not the week before? Or what if Apple announces record pre-orders or sales that would clearly require adjustment in both Q4 and Q1 numbers? Or if the event disappoints some technical experts who angrily take it online? (Okay, that’s it, of course.) Maybe some production flaw comes up in early October and the phones start burning? OH MY GOD! (Even though Samsung came out of it almost unharmed, Apple would be crucified. But no, that won’t happen.) Or do they call it iFacePhone? * facepalm *

But seriously, why don’t you get all the possible facts available before the report? Well, that’s exactly what I wanted to test about my model and assumptions, and there’s no better opportunity than these two months before this particular supercycle. I wanted to test the value of these assumptions and whether the forecast is fragile or robust in relation to uncertainty, in the absence of objective factual details, already based on relatively consistent but subjective patterns, perceptions, conjectures and usually vague but fairly reasonable (and most essential IMO) notions of management style, strategy, priorities and cultural values. Patterns, forebodings, and concepts that I rarely share or explain extensively (and still won’t) because opinions are cheap, so only the easiest, most expressive, alluring, or most obvious nasty ones are noticed (helped by both its proponents and slanderers), and there is never responsibility for everything this incredibly fruitful but wasteful teaching. Even the cold, mostly without opinion, number of outside analysts hoping for 1 or 2 years are never evaluated or even checked after the facts are learned, and the latest revisions in one quarter have the only chance to establish confidence in the cacophony of key, usually existential , long-term judgments and predictions.

Oops, a little tangential noise there. Anyway, if I think I can somehow model Apple’s business 2-3 years or even in advance and hope to do so somewhat reliably, it would only be thanks to just this kind of intuitive understanding of the company, not just knowledge of the launch date or exact price or a stupid name or a precise mechanism to unlock a high-end phone. By much less careful monitoring of the extent to which WS analysts raise their estimates up to the date of the report, so that speculations about or just before their herd-like behavior can be reconciled. No, the added value I want to provide is not achieved by waiting to gather all possible data and after all the events and learned facts are known, only then make an assessment, the best informed person. Because contrary to what financial reporting (even good details) would suggest, the goal is not to get the best forecast for the last quarter at all, which in fact has minimal impact on stock valuation. Instead, it is about somehow developing as realistic a picture as possible of what the next 5-10 years will look like, which really represents most of the intrinsic value of an investment. So my insights (or lack thereof) into that long-term future can only be appreciated when I am forced to insert some premonitions and hopefully educated speculations into the model, and once some short-term events and outcomes that actually depend on some of these assumptions are revealed , it could be possible to assign an appropriate level of confidence to those long-term projections that bring value to the company.

Okay, enough excuses for this crazy stupid guessing game. Anyway, I will do everything, and you should always do your job, never assume I am here to do it for you. In fact, suppose I’m just trying to have fun. And nothing is more fun and rewarding than trying to guess things at the end of the year before everything is revealed, just as the joy of Christmas and Santa Claus is left to the creation of expectations and the excitement of surprises.

Sorry for the long philosophical dissertation. According to this specific forecast (see below), it seems that ZS analysts should reach a consensus in the first quarter when they see guidelines, which is likely to force them to lift in tandem the rest of the year, until the end of January when guidelines are given for the second quarter . Then, that second-quarter referral could come as a small omission (expectations in the second and fourth quarters were already somewhat elevated well before the hypothetical reaction to the guidelines in the first quarter up) and cause a healthy reversal of those expectations. Or maybe I’m a little short and everything will be fine. We will have to wait and see how that dynamic unfolds in October and January.

I will spare you any additional comments on the current and next quarters as there would be too much to cover other than this one I last promised to repeat: consensus estimates in fiscal 2019 on at least single-digit growth seem key to continuing stock appreciation. They will be publicly available on the financial website after the fourth quarter is reported (probably October 31). Of course, the guidelines for the three-month December with respect to the same day are extremely important, but everyone already knows that. Right? All right. Remember, then, you can also peek into estimates for 2019, and perhaps allow a few weeks for analyst model updates to penetrate data services to see how they evolve at an early stage.

Remember, those expectations for 2019 will be the basis of a bearish “difficult comparison” case launched against Apple, just like at the 2015 summit, and unless tax reform passes or double-digit growth from the supercycle continues until 2019 ( reasonable option), this will certainly play a role against investor confidence in the company’s medium-term outlook.

Detailed estimates:

3mo ending Sep-2017  Rev($M)  GM(%)  EPS($)
-------------------  -------  -----  ------
Analysts consensus    51,090      -   1.88
Apple guide low       49,000   37.5   1.75*
Apple guide high      52,000   38.0   1.93*
My estimates          51,574   38.1   1.92 (5.19b shares)

3mo ending Dec-2017  Rev($M)  GM(%)   EPS($)
-------------------  -------  -----   ------
Analysts consensus    86,860      -    3.83
Apple guide low (e)   85,000   38.0    3.69*
Apple guide high(e)   87,000   39.0    3.91*
My estimates          87,349   39.4    3.98 (5.13b shares)

*EPS guidance ranges derived from other figures provided
 by Apple and diluted shares outstanding estimated by me

12m ending Sep-2018  Rev($M)  EPS($)
-------------------  -------  ------
Analysts consensus   261,980   10.88
My estimates         259,669   10.88

Valuation (fwd-12mo from)  EPS($)   Y/Y  10x  Cash*  Div  Tot
-------------------------  ------  ----  ---  ----  ----  ---
Trailing       (Oct-2016)    9.04    9%   90    29  2.40  122
Fair Value     (Oct-2017)   10.88   20%  109    31  2.64  143
1yr Target     (Oct-2018)   11.46    5%  115    36  2.96  154

* Cash per share balance net of long-term debt

(click to enlarge)

F4Q17 Revenue breakdown:
iPhone    30,041 (47.5 × $632)
iPad       4,541 (10.5 × $432)
Mac        6,666 (5.05 × $1,320)
Services   7,548
Other      2,742 ( 3.0 × $391 = 1,172 Watch)

Income statement:
Revenue   51,574
COGS     (31,928)
GM        19,647  38.1%

OpEx     ( 6,784)
OpInc     12,863  24.9%

OIE          505
Pre-tax   13,368

Tax      ( 3,409) 25.5%
NetInc     9,959  19.3%

Shares     5,189
EPS        $1.92

(amounts in millions except $ASP, $EPS, and ratios%)

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Naveen Kumar

Friendly communicator. Music maven. Explorer. Pop culture trailblazer. Social media practitioner.

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