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Disappointing sales figures from Apple have spurred a whirlwind of controversy among investors.
growth implicit in guidance raises growth concerns. We reset estimates and cut our price target to $575. Trading at $460 in the aftermarket (~7x PE ex cash) we view AAPL as undervalued; maintain Buy.
A tough setback, but the story is not broken
Apple reported 1QFY2013 revenues of $54.51 billion, above our estimate of $53.56 billion and just below consensus of $54.73 billion. EPS of $13.81 was above our estimate of $12.58 and consensus of $13.44. Gross margins of 38.6 percent and operating margins of 31.6 percent were above our forecast of 37.0 percent and 29.4 percent. iPhone, iPad, and Mac units all fell slightly short of our expectations, although more resilient margins led to the slight EPS beat. Apple’s guidance was essentially what we expected from the typically conservative management team. The problem, and the key disappointment in the call, was that management made it pretty clear that it was moving towards providing more realistic guidance. In this case, the guidance was a definitive disappointment.
Apples and Oranges: Fundamentals and Investor Expectations Continue to Diverge
We reiterate our Overweight rating and Dec-13 price target of $725 on Apple. We are surprised by the sharp correction in shares of Apple in last night’s after-hours trading. At one point, the stock declined 10 percent, as the company tried to explain its new guidance approach. Without splitting hairs too much, we think the new guidance commentary is not much of a change and could restore beat-and-raise potential to the model.
Downgrade to Hold: Demand Slowdown and Margin Pressure
We are downgrading Apple from Buy to Hold due to: 1) slowdown in iPhone sales is real and material; 2) we believe margins are likely to continue to fall; 3) new guidance methodology implies less potential upside to the model. We cut our estimates and PT from $800 to $500.
Moving into the Value Territory? F1Q13 Results
While we expect growth investors to continue losing interest in the story as earnings growth is unlikely to materialize this year, the stock offers plenty of reasons for value investors to step in at these levels. We reiterate our Buy rating while lowering our PT to $575 from $600.
Reiterate OW. The medium-term risk-reward is attractive with our Base case EPS now close to the Bear case and positive catalysts in F2H13. But near-term catalysts are limited as Apple faces tougher comps in C1Q13; as a result, Apple is being removed from the Best Ideas list.
After disappointing quarter, new products are needed to drive future growth
The results for Apple’s two key products suggest that iPhones and iPads are now growing broadly in line with the overall market for smartphones and tablets, i.e., much slower than growth rates seen in the last few years. Additionally, the margins have shrunk considerably, with the overall gross margin down by more than 600bp YoY. With slower growth and greater competition, a rapid recovery looks unlikely to us, at least based on the current product line-up. We have therefore cut back dramatically on growth rates for the iPhone, with revised growth of 12 percent for FY13 (previously 20 percent). We have also taken down our assumed margins, looking for a 45 percent margin on iPhones (over 50 percent previously) and 30 percent on iPads (35 percent previously). The net impact of these changes is to cut our EPS forecasts by over 25 percent for FY13 and FY14.
Given the decline in the share price, we are lowering our 12-month price target to $888.00 from $1,111.00 for Buy-rated Apple, which is based on over 13x (S&P 500 multiple) our interest expense/income adjusted CY14 pro forma EPS estimate plus net cash per share of $144.75. This equates to a straight P/E of just over 15x our CY13 EPS estimate, and is well below the mid-20x's multiple of 2006-2010
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