Monster’s Perspective:
Does Capital Expenditure at AAPL
Signal MONSTER Holiday Season?

The time of year is probably even more important than news events as summer vacations have slowed trading activity to a crawl. Equities have melted higher during July and August and are now drifting near multiyear highs. On the bearish side, investors see debt problems in Europe and lackluster growth globally. But it’s been hard to sell stocks as the economy skirts recession and corporate finances continue to improve.

What better time to talk about AAPL and the Christmas Holiday season?

During the July earnings call CEO Tim Cook and CFO Peter Oppenheimer said that Apple’s 4Q 2012 earnings guidance would be down due to a “product transition.” Now to me that sounds like code for “we’re building inventory for a new product.” The two Apple execs repeatedly referred to “confidence in the new product pipeline,” also code for a new product coming from the company. Traditionally, increases in capital expenditures at AAPL have a direct correlation to revenue at Apple, thus the spike in spending suggests the company may be set to deliver another record quarter this holiday season.

Morgan Stanley’s Katy Huberty did the following calculation for us: “Apple’s revenue and capex exretail stores have been 97 percent correlated over the past seven years and the acceleration in capex growth signals a similar acceleration in revenue growth, in our view.” AllThingsD’s John Paczkowski also sees Apple’s prepayments for inventory components ramping up in a big way. Paczkowski pointed out that AAPL’s prepayment for inventory components in the June quarter rose US$1.15 billion over the previous quarter. If you’ll pardon the pun that’s a MONSTER buildup!

Morgan Stanley’s Huberty is forecasting Apple’s revenue to reach $56.4 billion in this year’s holiday quarter. Based on historical trends, Apple needs to allocate only $1.8 billion of its implied $3 billion of capital expenses in the current quarter to reach that revenue estimate. Investments outside of new product production, such as Apple’s ongoing data center expansions, are not likely to represent a majority of the company’s capital expenditures, Huberty said. Therefore she believes the $3 billion in expenses planned by Apple in the current quarter suggests a likely upside to her forecast of $56.4 billion in revenue for the holiday 2012 quarter.

Apple’s best-ever quarter came in the holiday shopping season of 2011, when the company earned $46.33 billion in quarterly revenue and $13.06 billion in net profit. With the presumed launch of the new iPhone this fall, along with other potential products, Apple is poised to easily exceed its previous record.

Jon “DRJ” Najarian


Jon ‘DRJ’ Najarian is co-founder of optionMONSTER® and co-lead analyst for the InsideOptions™ trade idea alert systems. He spent the first 29 years of his trading career trading in and around the pits of the Chicago exchanges. Jon is a frequent contributor to CNBC, the Wall Street Journal, and other prominent financial media organizations. Mr. Najarian also co-developed the patented trading algorithm the Heat Seeker®, used to detect unusual trading activity.

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