Apple Inc. (NASDAQ:AAPL) Actually Contracts in Q4 2016
Investors in Apple Inc. (NASDAQ:AAPL) are missing something very important. I want to make it clear in this article and allow everyone to make an educated opinion free of headline touting and banner waving.
First, I am ONLY concerned with Revenue and EPS growth rates and the associated valuation based on that. Dividends and Shares buybacks mean nothing to me because they would not be possible without Revenue and EPS, so the focus here is on the basics.
- The headlines yesterday were seemingly unanimous: 'Apple Has Started to Grow Again.'
This implies that AAPL actually did better in Q4 2016 than in Q4 2015, but that is not actually true. If you are a die-hard AAPL bull this is where you stop reading, I get it, you don't want to hear it, but for everyone who is objective the following will make sense.
First, the reported numbers are beer in Q4 2016 than Q4 2015, but that's not the entire picture.
AAPL had an extra week in which to earn money in Q4 2016 when compared to Q4 2015. Instead of 13 weeks as was the case in Q4 2015, AAPL had 14 weeks in Q4 2016, and that's 7.69% more time.
For sophisticated investors the following statement may come across as juvenile, but based on responses from my Marketwatch article on this subject it is required. If you give a company 7.6% more time to earn revenue and EPS, in order to keep pace the result should be 7.6% better. Anything less than a 7.6% improvement in both revenue and EPS would then imply that the pace of growth was slower than before, and anything better than 7.6% would imply better growth.
- During 14 weeks in Q4 2016 AAPL earned $3.36/share on $78.351 Billion in Revenue.
- During 13 weeks in Q4 2015 AAPL earned $3.28/share on $75.872 Billion in Revenue.
EPS Weekly Breakdown Calculations and Formulas:
- Q4 2016 EPS weekly results EPS/14 = $3.36/14 = $0.24 per week.
- Q4 2015 EPS weekly results EPS/13 = $3.28/13 = $0.252 per week.
The mathematical conclusion given this weekly EPS comparison is that AAPL grew at a 4.76% slower rate in Q4 2016 than n Q4 2015. ((0.24 - 0.252)/0.252)
Revenue Weekly Breakdown Calculations and Formulas:
- Q4 2016 Rev weekly results Rev/14 = $78.351/14 = $5.5965 Billion per week.
- Q4 2015 Rev weekly results Rev/13 = $75.872/13 = $5.8363 Billion per week.
The mathematical conclusion given this weekly Rev comparison is that AAPL grew at a 4.11% slower rate in Q4 2016 than n Q4 2015. ((5.5965 - 5.8363)/5.8363)
Admittedly, a weekly revenue run rate that dwarfs the annual run rates for most companies is impressive, but the same valuation metrics still apply, and we need to ask ourselves if the company is growing. The issue here is the confusing headlines.
- AAPL did not grow in Q4 2016 versus Q4 2015. In fact, the rate contracted.
The only reason it seems like AAPL grew is that there was an extra week added to Q4 2016 results that was not there in Q4 2015, so the company had 7.6% more time to add to Revenue and EPS, but instead the net result was a weekly run rate contraction of 4.11% and 4.76% respectively.
- In addition, the company guided lower going forward.
And then, these results also came when a major competitor seemed to lose considerable market share (Samsung), so we would have expected much better numbers, but again we saw y/y contractions.
Those contractions + reduced guidance are red flags, but no one seemed to see this after the AAPL release yesterday. They are fixated on the published number, and very few if any have bothered to factor in the added week of time AAPL had to produce results in Q4 2016.
As an analyst and investor, I think you need to do that.
When you do that ask yourself this question (we have answered it in the report below): is no growth worth a 15-16 multiple? You can now make an educated decision.