Apple Needs to Execute, No Longer Innovate

Yesterday, Apple released its earnings for its first quarter of fiscal 2008 that ended December 29, 2007. Revenue was $9.6 billion, up 35% y-o-y and 54% sequentially driven by the strong sales of Macs, iPhones, and iPods. Net income was $1.58 billion, or $1.76 per diluted share, up 58% y-o-y. Gross margin was 34.7%, up from 31.2% last year. Its cash balance increased by over $3 billion in the quarter and now rests at over $18.4 billion. Read my earlier post on what I think it might do with it.

In the quarter, Apple shipped 2.32 million Macs, a y-o-y growth of 44%. Mac products and services accounted for 47% of the revenue in the quarter. Its OS Leopard, released on October 26th, has already raked in revenue of $170 million during the quarter.

Music products and services represented 50% of revenue in the quarter. Apple sold over 22.1 million iPods (up 5% y-o-y) and over 2.3 million iPhones during the quarter. The total iPhone count has now moved to 4 million since the launch. Total revenue from sales of iPhone, iPhone accessories, and payments from carriers was $241 million in the quarter. It is not just the iPhone that is doing well. Even the iPhone inspired smartphone HTC Touch did well with sales of 2 million.

The iPhone launched successfully in the U.K., Germany, and France. Apple will roll out the iPhone in some more European countries and Asia in 2008. It looks all set to achieve its 2008 goal of 10 million. Apple’s international business grew 46% y-o-y, which is a good sign with the slowdown of the US economy. Its domestic business also did well with 27% y-o-y growth.

However, Wall Street is bent out of shape. Apple’s shares went down by 11% or $17 to $138.49 in after-hours trading yesterday. One reason is that its revenue target of $6.8 billion or 29% growth y-o-y is much below the analyst consensus of $6.99 billion. Another is the flat domestic sales of iPods. Plus there are concerns that with the US economy slowing down, consumers might not go for its high-end gadgets.

Whatever the reasons might be, I think it is a good time to buy the stock. It is currently trading around $129 after hitting 52-week high of $202.96 on December 27.

Why? Multiple reasons.

1. The iPod franchise is still spectacular, maintaining over 70% market share, and is basically becoming a multi-billion dollar, highly profitable cash cow.

2. Apple is turning its attention to the Mac business, with good results, and a large, high growth market opportunity awaits it.

3. Similarly, the iPhone is also in a large, high growth smartphone market, where Apple has rapidly risen to the #2 market share position behind Rim.

I am delighted that Steve Jobs did not pull yet another “new thing” at MacWorld this year. Instead, Apple is focusing on the businesses that are already in gear.

For Apple, today, execution is the name of the game, not innovation. And Apple stock is a long term buy and hold over the next 3 years.