AAPL, I was wrong...Bernstein on the iPad

Bernstein Initial reaction: Stretched out Touch.
Now: “By any account, the iPad is a runaway success of unprecedented proportion.”

• In the first 80 days, AAPL sold 3M units, the current run rate looks to be closer to 4.5M/quarter. This is destroying all previous records of consumer electronics adoption.
• At the current pace, the iPad is annualizing around $12B in sales.
• Bernstein is forecasting 18M units for 2011 (bullish 2011 estimates have approached the 30M unit mark, translating to $20B in sales.)
• The US market is 45%, about $9B—the total US consumer PC category is about $25B ($19B note/netbooks)

PC’s are feeling the bite.

• In an environment where consumers’ consumption dollars are limited, they are choosing the iPad.
• Using NPD data, unit growth rate for consumer PC’s as of March (just prior to the iPad introduction), was 25%. By June, three months after the iPad, the rate had dropped to 8%, as of August 3%.
• At the notebook level, it’s even more pronounced. Growth fell from 28% in March, to 8% in June, to 1% in August. Consumer notebook sales are on the verge of declining on a y/y basis—this is the first time since the data series began 2005—when y/y growth was 14%.

Cannibalism is happening.

• The iPad is sucking up dollars that would be used to buy other discretionary items (TV and SLR camera sales have declined as well).
• Best Buy is a good example—the cannibalization of the netbook/notebook category was material.
• This could continue into the holiday season—if the luster of a touch screen is enough to draw the money toward it.

AM Notes

GLD: After trading in a clear bear flag pattern for the past 7 sessions, gold is finally showing signs of a bearish continuation breakdown. August gold futures are now back below the key 1200 level (which correlates with about 117.25 in GLD). For now, the trend on the smaller timeframes is to the downside. With all the hope invested in this trade, it could empty out badly, so traders should avoid scaling longside interest. This is a small, thin market, and extensions/shakeouts can be heartstopping when large stops are hit. A reasonable target on a break of the recent 1185 lows (116.10 in GLD) would be the 1170-1175 area (114.50 in GLD).

GOOG: After missing on the bottom line yesterday, shares of Google are trading lower this morning, bringing several key support levels into play along the May lows, including, at the outside, the lows of the May 6th "Flash crash" in the 460 area. The stock is trading around 473 in premarket action.

Economic Data Reviews: CPI Declines for the Third Consecutive Month: consumer prices declined 0.1% in June after falling 0.2% in May. This was the third consecutive monthly decline. While deflationary pressures exist, core prices remain positive. Core prices rose 0.2%, slightly higher than the consensus estimate that called for a 0.1% increase. Most of the decline in the headline number was due to weaker gasoline prices. Gas prices fell 4.5% and led the energy index down 2.9%. Oddly, food prices remained unchanged for the past two months.

Economic Data Trumps Earnings: What is being done by earnings is being trumped by economic data. The enthusiasm for the good news is being mitigated by continued mixed economic data that is keeping concerns alive about a more meaningful slowdown in the back half of the year. After upside results from Alcoa, Intel (INTC), JPMorgan (JPM), and CSX Corp. (CSX), Google's (GOOG) results left much to be desired as higher costs ate into earnings despite higher top-line growth. The tech sector is expected to post the strongest performance this quarter. The market's focus shifts today to Apple (AAPL), which reports its earnings on July 20th, as the company addresses ongoing reception problems with the iPhone 4 in a press announcement at 1:00 p.m. ET. GE pulled off a $0.02 beat despite weaker revenues, driven by margins and higher Capital profits. Of note, industrial orders were up 8%, while major equipment orders were reported up 17%. The takeaway: a modest, but in-line showing. That is it from GE after the company stopped providing forward guidance.

The plethora of data and headlines crossing the wires is only adding another level of uncertainty as market participants attempt to digest conflicting views. The flow continued with the June CPI report, which came in pretty much in-line with expectations for total and core. On a year-over-year basis, total CPI is up just 1.1%, while core CPI is up only 0.9%. These are the trends that will keep FOMC members talking about potential risks of deflation. Alternatively, they are the type of numbers that indicate the FOMC won't be raising the fed funds target rate anytime soon.

The landmark financial reform legislation passed, ending a year-long effort to overhaul the U.S. financial system. Clarity over the new regulations and the changes is good news from the markets' perspective. Treasury Secretary Tim Geithner said he plans to leverage the legislation to put in place much stronger capital standards as the Basel negotiations begin.

Separately, shares in Goldman Sachs (GS) rallied after the investment bank agreed to pay a $550 mln fine to settle civil charges.

The second major overhang that was effectively removed from the market was the oil spill in the Gulf of Mexico. After 12 weeks, BP (BP) stopped the flow of oil from the blown out Macondo well. Pressure readings every six hours will tell engineers if the steel casing retained sufficient structural integrity. If the tests come back positive, the well could be shut off long-term. And while the news sent shares of BP rising, the wake of spill-related costs and damages caused by the blowout have just begun.

Baltic Dry Index Sees First Positive Session Since May 26. The Baltic Dry Index (BDI) broke its 35-session losing streak overnight as the Capesize joined the Panamax in rebounding. The BDI gained 20 points, or 1.2%, to close at 1,720. It had lost 59.6% since May 26. The two primary drivers of the downtrend both rebounded. The Panamax Subindex rebounded for a fourth day, gaining 3.1% overnight and 7.8% since Monday. It had been in free fall from June 28 through July 9, losing 36.2% in just those 10 sessions. The Capesize Subindex finished in the black for the first time in 15 sessions, rebounding 2.2%. It had also been in free fall from July 6-14, losing 35.9% in just those seven sessions... Note: The BDI is an assessment in price of all the major raw materials transported by sea. Since the index measures end demand for commodities aboard bulk carriers, including cement, coal, iron ore, steel and grain, it is used as a barometer of economic demand.

AAPL: Bernstein raising estimates

AAPL (Toni Sacconaghi): 3M iPads were sold in its first 80 days ont he market, outpacing the iPhone, iPod Touch & all netbooks for their full 1st Q sales. The high end of buyside expectations is ~ 25M for 2011. Under a 25M unit scenario, iPad would add $15B in revs & 1700 bps of rev growth to Apple in FY 11. However, iPad's GMs are not known (we est ~30%, at the low end of estimates) providing a big range of EPS ($2-$4) & GMs (0 to -200 bps) outcomes for FY11. Toni outlines bull & bear considerations & estimates 18M iPads for FY11. Raising '10 and 11 EPS. Outperform, TP $300.