Adjusting Apple’s Estimates to $500 Post Earnings

Apple (NASDAQ:AAPL) announced its earnings Tuesday beating its own guidance though it failed to live up to lofty consensus estimates for the first time in years as iPhone sales showed a decline of more than 3 million quarter-on-quarter.

Subsequently, the stock fell by as much as 8% in extended trading, which we believe is indicative of the short term speculation around earnings. However, given the fundamental of its core business and the outlook for the iPhone, we believe the stock is attractive for those with a longer time horizon. During this quarter, the company  sold around 17 million iPhones, posted strong iPad and Mac sales numbers, announced updates to its Mac Mini and MacBook Air as well as worked out supply chain kinks for the iPad. As the company takes its first steps into a quarter without Steve Jobs, we look at how its iPhone, iPad and Mac sales stack up versus rising competition from Google (NASDAQ:GOOG), Samsung, HTC and an ailing Research in Motion (NASDAQ:RIMM) in the smartphone and tablet markets.

We have revised our Apple estimates slightly lower to $502, which is about 25% above market price.

See our full analysis on Apple

iPhone Sales Show up Pent up Demand for 4S

The iPhone contributes more than 50% to Apple’s market value, and it seems like customers have been putting off buying the phone until the launch of the iPhone 4S. However, with the record breaking debut of the iPhone 4S, it doesn’t look like the “disappointment” will carry over to the subsequent quarters.

In the earnings calls, Apple’s CEO stated:

We were pleased with the iPhone sales growth as we prepared for the transition to the iPhone 4S. We expected iPhone sell-through to decline sequentially from the June quarter as a result of new product rumors following the announcement at our Developers Conference in June that iOS 5 and iCloud would become available in the fall. As we predicted, iPhone sell-through did decline across the quarter especially in the second half as new product speculation intensified.

iPad Outlook is Still Strong

Apple sold around 11 million iPads, up from 9.25 million last quarter. This is partly due to the the 20 additional countries that also launched the iPad 2 versus its predecessor along with the strong enterprise adoption. Also, the company dealt with some supply chain constraints that had dogged the company earlier this year. This helped the iPad penetrate fast-growing markets like Greater China (Mainland China, Hong Kong and Taiwan) where revenue growth leaped 4x year-over-year.

As tablets penetrate the enterprise segment, there could be ample upside to our iPad forecasts. We believe our estimates could be a little conservative for now, but you can adjust the trend line above to test your own thesis on iPad’s growth.

Mac Sales Growth Plays Down Fears of Cannibalization

Apple sold 4.89 million Macs in the quarter, a significant 24% growth quarter-on-quarter despite fears that its own iPad might be eating away into Mac’s sales. With good sales both on the iPad and the Mac front, Apple has shown that the two can coexist. What this also means is that Apple’s competitors in the PC business that sell Windows-based computers need to worry as both the iPad and the Macs might munch on their market share.

Overall, we believe that the outlook for the company remains very positive and though we have moderated our iPhone and gross margin assumptions slightly, we believe that there is plenty of value left in this stock.

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