Apple's Q2: A test of fundamentals

[Originally posted Aug. 22, 2009 on Fortune.com]

When Apple (AAPL) reported its fiscal 2009 first-quarter earnings, exactly three months ago, the stock opened the day at $78.20, its lowest point since October 2006.

On Wednesday, when Apple is scheduled to report its second-quarter results, the same shares opened at $122.27 -- a 56% increase.

While that's still below the price targets set by most analysts -- many of whom revised their targets upward in just the past week -- some think Apple's share price has got ahead of itself.

RBC Capital's Mike Abramsky (an Apple bear) said as much in a note to clients Tuesday. "Valuation has risen faster than peers ... and while we expect near term upside around the refreshed iPhone, we continue to see elevated challenges ahead to valuation."

Still, Apple is not in the same kind of trouble as its competitors -- like Dell (DELL) for example. Apple still has rich cash holdings ($25 billion, or $29 per share), enviable profit margins (34.7% last quarter) and the deferred revenue from seven quarters of iPhone sales (which could add 30 or 40 cents to its earnings per share).

But the company has a basic problem with its fundamentals: two of its three primary engines of growth have stalled.

As Silicon Alley's Dan Frommer points out, the Street is expecting Apple to report that it shipped 2.1 to 2.2 million Macs in the second quarter -- a year-over-year decline of 4% to 9%. That would represent the first time in five years that Mac sales have shrunk. Moreover, it's being compared with a quarter (2008 Q2) in which Mac sales grew by more than 50%. (See chart below.)

Arrington to Apple: Liar liar pants on fire

[Originally posted Aug. 22, 2009 on Fortune.com]

"A total lie." "Untrue." "Misleading." "Complete fabrication." "Way beyond misleading."

Those are some of the nicer things Michael Arrington had to say about Apple (AAPL) in his analysis of what he calls "Apple's long rambling letter to the FCC."

Arrington, for those who don't have Techmeme on their morning reading list, is the former securities lawyer and serial entrepreneur who runs TechCrunch, arguably Silicon Valley's most influential tech blog.

The letter he's referring to is Apple's formal response to an inquiry by the Federal Communications Commission into the role AT&T (T) played in Apple's rejection of Google's (GOOG) powerful Google Voice app. See here.

AT&T's answer: we played no role. Google's answer: redacted. Apple's answer: we never rejected the app; we just haven't, for various reasons, approved it yet. (link)

Arrington's response: Apple is lying through its teeth. In particular, he writes:

Why Google's CEO had to leave Apple's board

[Originally posted Aug. 3, 2009 at Fortune.com]

Much has changed since Eric Schmidt joined Apple's (AAPL) board of directors in August 2006, almost three years ago.

Schmidt, the former chief technology officer of Sun Microsystems (JAVA) and now the CEO of Google (GOOG), brought to Apple's board deep expertise in Web search and advertising, a shared distrust of Microsoft (MSFT) and almost no conflicts of interest.

But in the past three years the areas of overlapping interests -- from smartphones to browsers to operating systems -- have grown so great that the Federal Trade Commission in May opened discussions with the two companies about whether Schmidt's presence on Apple's board constituted a violation of the Clayton Antitrust Act. (link)

And on Friday the Federal Communications Commission launched a pointed inquiry into Apple's decision to bar a powerful Google voice mail management program from its iPhone App Store -- an inquiry that put Schmidt and Apple CEO Steve Jobs on opposite sides of a Federal investigation.
Finally Jobs announced on Monday what had come to seem an inevitability: that Schmidt was off the board.

Putting lipstick on Microsoft's pigs

[Originally posted Aug. 6, 2009 on Fortune.com]

At the end of a long report on the Apple Stores -- and the corner he believes they have turned -- Needham analyst Charles Wolf turned his attention this week to Microsoft (MSFT) and its plans to launch a fleet of company-branded stores of its own, complete with wall-sized digital screens, spaces for free public events and "Guru" bars to deal with customers’ software complaints.

Let's hope Steve Ballmer isn't on Needham's mailing list, because Wolf's two-page description of Microsoft's efforts and its products may be most dismissive ever produced by a Wall Street analyst. He even goes so far as to evoke the old lipstick joke that got Barack Obama in so much trouble with Sarah Palin during the primaries.

"Microsoft has always touted itself as an innovator," Wolf begins in a section entitled The Sincerest Form of Flattery. "But the company’s true genius has stemmed from its ability to copy the ideas of others."

And the company it's most fond of copying, he says, is Apple (AAPL).

Goodbye iPod, hello iPhone

[Originally posted Aug. 5, 2009 on Fortune.com]

Apple passed an important milestone last quarter that nobody on Wall Street seems to have noticed: the iPod, once Apple's (AAPL) No. 1 source of revenue, fell into third place after the Mac (No. 1) and the iPhone (No. 2).

Think of Apple's business model -- as Steve Jobs often does -- as a three-legged stool: Mac, iPod, iPhone. As recently as 2006, the iPod leg accounted for 55.5% of Apple's revenue. By last quarter, its share had shrunk to less than 18%.

But this is a good thing, argues Bullish Cross' Andy Zaky, a day trader and occasional blogger whose estimates of Apple's earnings regularly beat -- by a long shot -- the estimates published by professional analysts.

"Many Apple critics have argued that Apple would essentially fall off the earth because at some point in time the iPod's growth would collapse," says Zaky. "The second part is true.  The iPod growth rate has in fact fallen off a cliff as Apple posted its first yearly drop in iPod sales ever in Q3."

"However," he adds, "Apple is still firing on all cylinders thanks to the explosive growth of the iPhone."

To make his point, Zaky has prepared three charts that pretty much say it all.