In recent weeks we have seen myriad of issues that have lead to Apple Inc. (NASDAQ:AAPL)’s under-performance (-23% since Sep-19 vs. S&P -6%). According to RBC Capital Markets’ research report, there are five consistent concerns:
1) What’s the next product launch
2) Long-term gross-margin declines
3) Supply-chain constraints
4) 2013 Tax Increases
5) Management Changes.
The research firm believe fundamentals at Apple Inc. (NASDAQ:AAPL) remain strong and the stock should outperform over the next 6-12 months driven by A) Strong Dec-qtr results given impressive product line-up for holidays, B) Gross-margins begin to improve in Dec-qtr and beyond, C) Potential ramp with China-Mobile and iTV launch in 2013.
Concerns
What’s Next?
There is concern that innovation is slowing at Apple Inc. (NASDAQ:AAPL) as recent products are evolutionary in nature. Apple Inc. (NASDAQ:AAPL) historically has announced a new product line on a 3-year basis, suggesting that a new product could be launched in 2013 (June potentially). In RBC’s view, the next product could be an “iTV”, which redefines the living room experience.
Gross-Margins Structurally Lower?
This concern gained momentum post LQ’s guide for Gross-margins to decline by 400bps to 36%. The fear is Apple Inc. (NASDAQ:AAPL) now has to sacrifice gross-margins to defend market positioning. RBC, believe Apple Inc. (NASDAQ:AAPL)’s gross-margin guide is more reflective of their conservative stance and transitory ramp headwinds vs. structural challenges. Its analysis suggests that iPad mini while below corporate GM’s will end-up having better margins than iPad4. The research firm estimate iPad margins should sustain at the high 20’s range, while iPhone’s will carry a “low 50%”.
Challenges With Supply-Chain:
Apple Inc. (NASDAQ:AAPL)’s challenges with supply-chain may diminish the magnitude of upside. With the 2-3 week wait time for the iPhone 5 and 2 week wait time for iPad mini, the research firm – RBC Capital Markets, believe Apple Inc. (NASDAQ:AAPL) is seeing a 2.5 week impact from supply constraints for the iPhone and ~2M unit impact from iPad Mini. However, its recent analysis shows that constraints for iPhone 5 are starting to ease-up.
Tax Selling:
Investors may be locking in long-term gains before the expiration of the Bush Tax-Cuts. Notably, top tax-rate on capital gains is expected to increase by 15% in 2013.
Management Changes:
Investors are rattled by recent management changes and are taking a wait-and-see approach into Dec-qtr earnings-call.
RBC maintain its Outperform rating and price target of $750. Its price target is based on 15x FTM EPS (ex $121B in cash). The research firm believe Apple Inc. (NASDAQ:AAPL) deserves to trade at a slight premium to the S&P 500 as it continues to grow at rapid rates on both the top and bottom lines.
