There's a guessing game that goes on with Apple's quarterly financial reports which goes something like this:
Apple (AAPL) gives realistic yet understated forecasts for sales and profit in the coming quarter. Analysts, knowing Apple usually predicts lower results than it delivers, then read tea leaves to give clients the real deal on what to expect.
That's what happened on July 25, when Apple reported fiscal third-quarter results and Chief Financial Officer Peter Oppenheimer forecast fourth-quarter sales of $5.7 billion and earnings per share of 65¢. Apple ultimately reported sales of $6.22 billion, 9% higher than forecast, and earnings of $1.01 a share, 55% higher.
A New Set of Tea Leaves
Judging Apple's current quarter, the first of fiscal 2008, is even more of a mystery. On Oct. 22, when Apple reported fourth-quarter results, Oppenheimer gave what seemed like unusually aggressive targets. Sales would hit $9.2 billion during the all-important holiday quarter, about $700 million higher than the average estimate by Wall Street analysts. Hitting the guidance would mean a 29% increase, compared with 23% a year ago.
Was Apple taking a new tack and giving aggressive numbers closer to the "real" target or still giving the understated outlook? The consensus among analysts seems to be the latter, and they're back to making predictions for the coming year that may send the minds of even longtime Apple watchers reeling. Even some of the most optimistic among them may be right.
Consider the prognostications of Bear Stearns (BSC) analyst Andy Neff, who expects Apple to report sales of $9.67 billion, on earnings as high as $1.75 a share. He also says the stock will trade as high as $249 during the year. Not a bad trajectory for a stock that closed at $83.80 on the first trading day of 2007.
Typically, bullish sentiments like Neff's cause me to start looking long and hard for something to worry about. Trouble is, I can't find it. Of the many challenges facing Apple in 2008, none is problematic enough to run the stock off its rails.
Looking for Trouble
Last year at this time, there were clouds aplenty, many of them concerning the company's handling of stock options. The worst-case scenario included the possibility that Chief Executive Steve Jobs might find himself the target of a Securities & Exchange Commission lawsuit and the remote possibility of being barred from serving as a corporate officer. Those fears have all but disappeared. The options mess is largely over, with the $84 million restatement announced on Dec. 29, 2006.
True, the story will resurface next year. The case of former Apple General Counsel Nancy Heinen, sued by the SEC, is going to come to trial in 2008, and competing narratives of who did what and when will play out again. Among the witnesses expected to be called to testify is none other than Jobs (BusinessWeek.com, 9/20/07). Even so, Jobs is basically out of the woods. There's no concern he'll lose his job.
The only other thing I see that could threaten Apple's growth prospects would be a failed product release. It has been a long time since Apple has had one of those (remember the Cube?), and even though Apple TV isn't exactly lighting the planet on fire, calling it a failure would be an overstatement.
Faster iPhone on the Way
Apple gets its next chance to launch products at Macworld Expo in San Francisco. Jobs will give his keynote address on Jan. 15. As usual, Apple never discloses what it's going to talk about ahead of time, saving it all for the "Stevenote." But the rumor chatter points to discussion of a new, faster iPhone.
This part shouldn't surprise anyone. The biggest complaint since the initial announcement of the iPhone in January has been that its data connection to cell-phone networks is slow. Despite that, it's been a great success: 1.4 million had been sold by Oct. 22, and analysts are saying 8.5 million might be in use in the U.S. and Europe by the end of the 2008 calendar year.
A phone that runs on faster 3G networks is a lock for 2008 and should hit the market no later than June. If its existence isn't confirmed by March or April (Jobs may opt not to discuss it at Macworld for fear of depressing sales for a few months), this will be the first sign of trouble.
New Mobile Devices?
The rumor mills are churning about two mobile computing products: a thinner, lighter notebook and a tablet. A shakeup in notebooks has to happen, as Apple hasn't seriously revised its high-end notebook designs since before the transition to using chips from Intel (INTC) in 2005. The MacBook Pro, in particular, and the PowerBook before it have had essentially the same metallic look and feel (titanium, then aluminum) since about 2001.
As much as I love my MacBook Pro, competitors such as Hewlett-Packard (HPQ) and—dare I say it—Dell (DELL) have learned Apple's lessons well and are looking far less shabby when compared with a Mac than before. Consumers are still intrigued by notebooks that are thinner and lighter than Macs tend to be. An ultraportable MacBook Mini would be a great product.
Additional speculation concerns a tablet, a handheld that would either be a super-compact Mac with a touch-enabled screen or some kind of satellite device designed to interface with a Mac through a remote wireless connection. Normally I'd dismiss both, but Apple's innovative multitouch-screen technology, found on the iPhone and the iPod Touch, makes the concept not only plausible but attractive, assuming the feature set and price are right.
Wave of Brick-and-Mortar Buyers
Both would go a long way toward attracting disaffected Windows users, the so-called switchers, who've had it with Windows (MSFT) stupidity. The number of "new to Mac" consumers at Apple's retail stores around the world continues to hover at around 50%. The retail stores moved 1.4 million of the 7 million Macs sold last year, meaning 700,000 were sold to people who were new to the platform.
Assuming this number remains within the 50% range, the number of new Mac users could grow considerably. Apple finished its fourth fiscal quarter with 197 stores, and 40 more are expected during 2008, including one in Beijing that will open in time for the Olympics. The average Apple store saw 12,500 visitors per week in the fourth quarter, for a total of 31 million visits to all stores during the period. Assuming that weekly pace continues through the year, Apple can expect to see nearly 3 million store visits per week across its entire retail footprint in 2008. That's more than 150 million visits in total for the year.
Numbers like that make Neff's prediction that Apple will sell 8.8 million Macs in 2008 seem pretty solid. All told, he's expecting sales of $32.5 billion in 2008 and north of $39 billion in 2009. Ten years ago, during Apple's darkest days, who would have predicted that?