(By Mani) The results of Apple, Inc. (NASDAQ:AAPL) can be described as a calm before the storm as the company's soft third quarter and the upcoming not-so-great fourth quarter could be a lull before it reports a mammoth first quarter next year with sales of iPhone 5.
Cupertino, California-based Apple has been bitten by the product transition bug due to anticipation of new product ramps heading into the back half of the year.
The company reported lower than expected quarterly profit as iPhone sales slowed down due to an inventory work-down in China and satiation of initial 4S demand as customers await the release of the iPhone 5, which is expected to be available in October.
iPhone continues to be a flagship product for Apple. Since the release of the original iPhone in January 2007, sales have grown to represent more than 40 percent of Apple's total revenue.
Additionally, the gross margins on the iPhone are the highest relative to other product categories, which could help the company maintain a 40 percent plus gross margin profile if sales continue to represent nearly half of Apple's total revenue.
"In our view, the iPhone represents a seamlessly synced Enterprise and Consumer product that should continue to gain market share in the near and long term," Daryanani said.
Since the launch of the original iPhone, Apple has updated the product annually (e.g., iPhone 3GS and iPhone 4S) and has redesigned the phone every 2 years (e.g., iPhone 3G and iPhone 4). As a result, consumers are becoming aware of the product cycle, and this should cause increased seasonality in the product as consumers await updated and fully remade iPhones.
"While we expect iPhone momentum to slow in the September Q as the 4S product cycle matures, we expect the iPhone 5 refresh and the 8" iPad to catalyze another rich wave of demand into the holidays," Deutsche Bank analyst Chris Whitmore wrote in a note to clients.
The iPhone sales will be skewed more toward the December and March quarters in the future if Apple continues to announce updates to its product toward the end of each calendar year.
Notably, the December quarter has seen tremendous growth over the past four years with year-over-year unit growth of 88 percent (Q1:09), 100 percent (Q1:10), 86 percent (Q1:11), and 128 percent (Q1:12).
"In our view, a redesigned version of the iPhone every two years will likely result in higher unit sales relative to the iPhone "S" versions as carrier contracts last roughly two years and consumers have historically been attracted to the new design concepts created by Apple," RBC Capital Markets analyst Amit Daryanani said in a client note.
Despite the disappointing quarter and the timing of product refreshes, Apple continues to show impressive growth despite its size and should continue to benefit from the confluence of major product cycles, namely: the iPhone 5, new Macs and the new iPad in the second half.
Meanwhile, Apple is raising switching costs and increasing stickiness through iTunes, the App Store, iCloud, retail support, and even similar display quality across devices.
Apple also declared its quarterly dividend of $2.65 per share, which could broaden the shareholder base as value and income investors should be considering the name on a pullback.
On the technicals front, Apple is 20 percent above its 200-day moving average, so corrections shouldn't be too surprising near term. Also, the stock tends to consolidate a few months before and after an iPhone introduction before making a run.
However, the stock remains in a solid long-term uptrend, so the current weakness should be viewed as a buying opportunity, and especially at $570 levels, the stock looks attractive. So, if investors could afford a little pain in the near-term, they could see immense gains at the end of next two quarters as Apple appears to have a robust product pipeline heading into the holidays.