Delicious Apple

Apple recently announced its earnings for the quarter ended December 31, 2008. For the first time ever Apple exceeded $10 Billion in quarterly revenue. Record iPod sales and second-best-quarter-ever Mac sales helped push earnings to the highest level ever, despite a drop-off in iPhone sales. As anticipated here, foreign sales grew; they now represent 46% of Apple's total revenue.

International iPod and Mac growth seemed to be the leaders. US iPod sales actually contracted 3% year-over-year, while domestic Mac sales grew 2%. Foreign Mac growth was 16%, with several countries turning in growth over 20%. (Apple's overall year-over-year Mac growth was 9%.) Despite the US iPod sales, worldwide iPod sales were up 22.7%. All that growth was international. (A 300% growth in AppleTV might look interesting until you look at the small base from which that growth occurred; Tim Cook made clear that "we still consider this a hobby.")

Apple now holds about $31/sh in cash. Apple is adding cash on a quarterly basis; even as it amortizes iPhone profit over 24 months, it's receiving all the payments up front. Apple's cash conversion rate is -43 days (that's right, negative 43 days); free cash flow from operations was $3.6 billion.

For the rest of the year, I expect Apple to make significant high-margin software revenue from its Snow Leopard operating system upgrade, and I think the operating system could serve to encourage hardware upgrades and optional software packages (e.g., iWork). The countervailing wind is, of course, a deepening worldwide economic depression. People who use computers for work (like me, or like these guys taking over an office in D.C.) may be perfectly happy to buy upgrade hardware in this environment, but "toys" might fare differently. On the other hand, so long as the market for four-figure handbags is holding up, hundred-dollar music players still have some hope. Apple's margins -- stable from the year-ago-quarter at 34.7% gross margins -- remain high, and Snow Leopard should help.

Depending how the world's economic situation develops, and what Apple offers for sale, we could get all kinds of possible outcomes in 2009. With $1.78 per share earned in the first quarter of the 2009 fiscal year (compared to $1.40 projected by analysts, and an Apple-projected range from $1.06 to $1.35) and $0.90 to $1.00 forecast by Apple for the next quarter, one has to look out into the last half of the fiscal year to foresee whether Apple wins or suffers in its high-selling back-to-school period. Apple's future isn't independent of the world around it. Assuming Apple's guidance continues to be a bit conservative, Apple could unsurprisingly turn in a fiscal-2009 earnings of $6. (The back-to-school quarter is huge for Apple; the lamest quarter for Apple historically is the one Apple has forecast at $1.) The after-subtracting-off-the-cash price of Apple suggests a forward P/E of about 10.

Is Apple a P/E 10 stock in these markets? Better? Worse?

Over the long term, I think Apple's platform offers strong reason to see worldwide growth. As foreign countries' standard of living approaches the range in which Apple finds customers -- and as Apple offers more products and services interesting to people with lower and lower incomes -- Apple's worldwide appeal should continue to do very well. I continue to see Apple growing.

In the event of a news-lull price slump over the next quarter, I'll be interested in picking up shares on the theory that the shares have become a bargain.