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Getting to the Core of Apple's Earnings


Apple flat out gives conservative guidance, and it is going into the slower part of its year...

Ahead of Apple's (AAPL) earnings report, here are a few top line thoughts:

First off, one of my primary theses for tech is that devices like the AAPL iPhone will be a primary multi-year driver for a shift to another secular cycle for wireless backhaul investment and finally spur the movement to 3G and/or Wifi/Wimax broad adoption. So again, longer term, I like the fact that AAPL has sold four million iPhones. The iPhone owns 19.5% of the US Smartphone market. That's simply huge for a new product in competitive field. International sales will be great in the future and are probably under-appreciated.

Second, another long term note is that AAPL has produced many more lines of revenue generation within its business model, some recurring. I think AAPL's long term prospects are still solid with a stock that I feel can trade in the mid $200's given a reasonable period of time. Onto the current quarter: Here's the rub. The whisper number has gotten very high. I think it's over $1.80 now. That could be a tough number to beat and frankly the obsession with whisper numbers is one of the current problems for longs currently.

AAPL's shares are trading at 25x forward earnings and consensus estimates for AAPL's current quarter is at $1.62. It should beat the consensus numbers, but analysts have raised estimates a number of times so the consensus number they would have beaten six weeks ago was quite a bit lower than today's number.

Revs are $9.46 billion in revenue as consensus. Again, in the last six weeks we have seen this number rise quite a bit. AAPL flat out gives conservative guidance, and it is going into the slower part of its year. The current stock price may reflect some of this expectation. At this point many analysts don't give a lot of attention to AAPL's guidance.

So the key to AAPL's call, post EPS, will be did the 75 bps from Bernanke give us a sentiment boost to give some good reports the benefit of the doubt? And the other is does AAPL give us some significant new announcements on things like iPhone contracts in new markets, deals with new distribution partners or highlight any key margin boosters? The margin issue could be enhanced from iPhone revenue sharing agreement with AT&T (T)as well as the success of the new OS.

Bottom line, a pullback after the EPS report over the next couple days into a firming market would be the ideal entry. Any weakness to concerns about the iPod will be misplaced as long term strength with the iPhone and iTouch lineup are superior products with superior margins.
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No positions in stocks mentioned.

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