Charles Wolf: The Market Is Overreacting To The NPD Numbers

Posted by: Arik Hesseldahl on February 20, 2009

Apple stock is trading at about $89 a share this morning, about $10 a share lower than it was a week ago. Now of course the market is down in the dumps at moment as well, the NASDAQ is trading in territory not seen since mid-2002. But a lot of anxiety around Apple seems to be tied to this NPD report issued earlier in the week and the resultant projections from analysts.

Charles Wolf of Needham and Co. in New York has a new note out, issued last night, in which he tries to put the whole situation in perspective. Among other things, he says he’s expecting Mac sales to drop 5% in the quarter ending in March and for iPod sales to drop 11%. However he’s puzzled as to why Apple (AAPL) stock fell 4% on Thursday, two days after the NPD numbers were released. “Why the Street reacted to this news two days later is beyond us,” he write. “It’s a single month’s data; and it provides no information on international sales which account for 45% of worldwide sales in the March quarter.”

Apple’s official guidance, he reminds, calls for revenue to come in at $7.6 to $8 billion versus $7.5 billion in the year-ago quarter. Wolf is expecting $7.9 billion, but says there’s a “big gotcha” in the comparison of this year’s March quarter versus last year’s. Remember that Apple reports iPhone revenue on a subscription basis, the revenue booked for the sale of an iPhone is broken up over the course of eight quarters: Every dollar coming in from the sale of an iPhone contributes only 12.5 cents to that quarter’s revenue.

Since iPhone unit sales have been growing over the last 20 months or so, that means the iPhone revenue booked each quarter has gotten progressively bigger. A year ago the number was $365 million. For this year’s March quarter Wolf is expecting that number to grow to $1.5 billion.

Wolf’s “gotcha” is this: If you subtract out that $1.5 billion in iPhone revenue from the $7.6 to $8 billion Apple in revenue Apple says it expects to report this quarter, Apple would in fact be guiding for a year-on-year revenue decline of about 12%.

The upshot? Buy on the weakness, he says. “We view the 6% decline in Mac sales at worst as a non-event,” he writes. “And we would urge investors to exploit what we believe is the market’s overreaction and buy the stock.” His 12-month price target is $200.

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