Apple Message to Wall Street: iWin

By Rolfe Winkley for The Wall Street Journal

Apple is breaking the law of large numbers.

With revenue up 73% in the quarter through December to $46 billion, the tech giant eclipsed analysts’ expectations by an extraordinary $7 billion. The amount by which it beat expectations easily tops the entire quarterly revenue of BlackBerry maker Research in Motion.

Thanks to the release of the iPhone 4S, Apple sold 37 million handsets in the quarter. That nearly doubles the company’s previous record for handset-unit sales, set two quarters ago. Strategy Analytics analyst Neil Mawston estimates that Apple’s share of the smartphone market jumped to 25%, up from the previous record of 18% two quarters ago. And last quarter included no sales of the iPhone 4S in China. The model wasn’t released there until this quarter.

Meanwhile, the release of Amazon’s cheaper Kindle Fire tablet didn’t slow the iPad. Apple sold 15.4 million tablets, up 38% from the previous quarter.

Perhaps most amazing, Apple generated $16 billion of free cash flow in the quarter, leaving the company with a cash pile of $97.6 billion. That is larger than the market capitalizations of about 95% of companies in the S&P 500.

Understanding the potential of the iPhone, which was 53% of sales in the December quarter, is key to understanding the potential path for the stock. And it certainly still has room to run. While Apple’s handset now is offered by most carriers in North America and Western Europe, Mr. Mawston notes Apple can still expand distribution in Eastern Europe, Latin America and the Middle East. There also is China, where the iPhone is only sold through No. 2 carrier China Unicom, which has about 20% share of China’s mobile subscriptions. Larger carrier China Mobile, with nearly 70% share, offers a big opportunity.

However, investors can’t expect the iPhone to officially hit China Mobile shelves soon. Current iPhone models aren’t compatible with its 3G network. China Mobile needs to roll out a next generation LTE network, meanwhile Apple has to release an LTE-enabled model—something expected later this year.

Another limiting factor is the iPhone’s cost. Among the most expensive smartphones in the market, iPhones are typically purchased by those on postpaid calling plans.

Three quarters of the China market, and more of India’s, is comprised of prepaid subscribers. To appeal to these customers, Apple will have to sell a scaled down iPhone that would surely sport lower margins than existing models. Still that would offer an additional opportunity to expand its potential market.

With that still to look forward to, no wonder Apple is the Exxon of mobile. And, following its 8% after-market gain, it again passes the oil major as America’s most valuable company.

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