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Tech stocks - Monday, October 19, 2009

The Real Question Is How Big Will Apple Grow?

Despite the mixed earnings reports from banks last week, investors appear to believe that the worst is behind them as they pushed the Dow 97 points higher and the Nasdaq 20 points upward. Investors may have it right in the short term as Texas Instruments (TXN:NYSE) beat on both the top line and the bottom line delivering revenue of $2.88 billion and earnings of $0.42 per share. While both numbers were lower than the $3.39 billion in revenue and $0.43 per share in earnings from the same quarter in the previous year, both numbers still beat analyst expectations. Texas Instruments was up in after hours trading showing that it still doesn’t take much to excite investors. Still, Texas Instruments should be returning to its glory days like fellow chipmaker Intel (INTC:NASDAQ) and we’re sticking with our 12-month target of $27.

With Apple (AAPL:NASDAQ) up 25 percent since the last time they reported earnings, tech investors were not wondering whether or not the tech giant would meet its numbers, but by how much the company would beat analyst expectations.

Today’s numbers from Apple showed why the company deserves its P/E ratio of 33.2. Like a veteran slugger that is used to delivering home runs, Apple hit a grand slam by delivering earnings per share of $1.82 versus analyst expectations of $1.42. Revenues were a home run as the company delivered revenue of $9.87 billion compared to $7.9 billion in the same quarter in the previous year.

Making up these revenues were 3.05 million Mac computers being sold, 17 percent increase from the same quarter in the previous year. IPhone sales totaled 7.4 million units, a 7 percent increase from the same quarter in the previous year. Ipod sales were down 8 percent from the same quarter in the previous year as the company reported 10.2 million units.

With numbers like these, the real question with Apple is not if it’s going to go higher, but by how much? In our opinion, Apple’s future growth will depend on improving iPhone sales by allowing carriers besides AT&T (T:NYSE) to service the smartphone and the introduction of the “tablet” (there are far too many rumors about this product for it not to be introduced in the near future).

With most analysts estimating that Apple is currently responsible for 3 percent of the sales in the smartphone market, Apple no longer needs the exclusive deal with AT&T as they have shown the ability to produce enough iPhones to meet consumer demand. Working with Verizon (VZ:NYSE) and Sprint (S:NYSE) would not only improve Apple’s sales, it would also help the company take business away from Research In Motion (RIMM:NASDAQ) while dampening smartphone fledgling Palm’s (PALM:NASDAQ) future.

And will Motorola’s (MOT:NYSE) Droid take business away from Apple with the “iDo” claims it makes on the new recently launched ad campaign Verizon? We doubt it. One only needs to remember the Razr when it launched and quickly fell from grace after a few months. The supposed problems with the iPhone that the Droid addresses are not compelling enough reasons make the switch, let alone trust the Droid with a two-year service agreement. Droid will garner its headlines when it launches, but it’s hardly an iPhone killer. With the iPhone 3G currently available in 80 countries and the 3GS version in 64 countries, iPhone sales should continue to grow regardless of how many people buy the Droid.

But investors should be interested in the new products the company will launch in the near future as innovation at the company definitely drives the share price. With each new product introduction, Apple develops new legions of followers who purchase additional wares from the company. Apple commented on how back-to-school sales were outstanding and barring a meltdown in the economy, Christmas sales should be far better especially when you look at the company’s Q4 guidance of $11.3 billion to $11.6 billion in revenue and diluted earnings of $1.70 to $1.78. Since Apple decimated our 12-month target of $180 in 3 months, we’re revising our target. As always, we recommend taking a few shares off the table but then expect the stock to hit $240 over the next 12 months. Apple is still growing as a company and they certainly don’t show any signs of slowing down in the near future.