Behind Apple's impressive quarter

October 21, 2008: 7:22 PM ET
Apple sold 6.9 million iPhones in its fiscal fourth quarter – beating RIM's BlackBerry in unit sales. Photo: Apple

When Steve Jobs got on the phone to answer Wall Street's questions Tuesday afternoon during Apple's earnings call, it was a signal that Apple knows investors are scared. The last time I recall the Apple CEO doing that was eight years ago, when Apple missed its numbers in one of the first signs that the dot-com bust would hammer Silicon Valley.

Back then, Apple's (AAPL) stock lost more than half its value.

Clearly, one of Jobs's goals Tuesday was to head off such panic, and convince everyone that this time things are different. Back then Apple was a puny computer maker with a stagnant market, expensive products, and no obvious prospects for growth. The iPod and iPhone weren't born yet. The company didn't have a lot of cash. Fast forward to 2008 and Apple's Mac sales are growing faster than its rivals, its iPods rule the MP3 player market and the iPhone is on a tear.

"We are not economists; your next door neighbor can likely predict what's going to happen as accurately as we can," Jobs said in a nod to the gloomy global financial picture. But then he went on to argue that Apple should continue clobbering its competitors no matter what.

It's not a hard case to make, especially considering the numbers Apple just posted. Profits were $1.14 billion on sales of $7.9 billion. But because of accounting rules that affect the iPhone and Apple TV, that actually understates the strength of Apple's quarter. Counted another way, Apple actually sold $11.68 billion worth of product in the quarter, worth $2.44 billion in profit. Apple's cash hoard ballooned to nearly $25 billion, leaving it with more cash than any other debt-free technology company. (That's more than Microsoft (MSFT), Intel (INTC), or Google (GOOG); Cisco (CSCO) has more than $26 billion in cash, but it also has about $7 billion in debt.)

So Apple has enough money to do pretty much whatever it wants – build factories, hire engineers, even send a rocket to the moon. And this should indeed give investors a sense of security, especially those who are thinking about buying into Apple at this price.

In fact, you'd have to turn the clock back to the fall of 2006, before the success of the iPhone and the disappointment of Windows Vista, to find the sort of value the stock price now holds. Here's the thing: Because Apple has about $25 billion in the bank, the $81 billion market value Wall Street has given the company is actually somewhat misleading; subtract the cash, and the street says Apple is worth only $56 billion, or about $63 per share. For a company that's growing at Apple's pace – it sold 6.9 million iPhones in the quarter, up from 1.1 million a year before – that seems pretty cheap in any economy.

Of course, these days the economy has a way of making fools of us all. With tight credit markets and companies cutting back, it's possible that consumers and businesses just won't have the money to continue their Apple-buying spree. "This is definitely a concerning environment from a credit perspective," Chief Financial Officer Peter Oppenheimer said, mentioning that he is closely watching Apple's accounts receivable. "It's a tough environment. Hopefully we won't have issues in the future."

And Apple has certainly taken a gamble by leaving its laptop prices pretty high, rather than cut them drastically to lure penny-pinching consumers. (Apple recently dropped the price of its entry-level laptop to $999, but its redesigned laptops offer more features at the same old prices.) It's hard to blame Apple for holding the line on price – after all, if consumers will pay more, why not let them? But it could backfire. If the economic picture continues to worsen and Apple's sophisticated target buyers start bargain shopping, they could delay purchasing that Mac or iPhone – or choose something cheaper.

This idea is not lost on Apple. While Apple is holding prices for now, Jobs hinted that cuts are coming next year for the iPhone. With more competition coming from the likes of Google's (GOOG) Android phone platform, "We have to not leave a price umbrella under us, and we're working very hard at fulfilling those goals." In other words, Apple engineers are hard at work cutting costs out of the next iPhone.

And in the end, that might be the most encouraging news of all.

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