Is it time for the Sell Side to throw in the towel on Apple (considering how bad their coverage has been)? Apple Inc. (NASDAQ:AAPL)'s falling share price might not be the crack of doom for the tech giant as short-sellers are expecting.
Apple Inc. (NASDAQ:AAPL) got jolted and the competition added a nasty sting to it. There is no question that Apple is facing many problems, but low profit margins and tough competition are not company specific. Recently, Apple traded below $500, but Barclays Plc (LON:BARC) (NYSE:BCS) still puts the price target at $740 in a year.
Barclays’ equity research report on Apple Inc. (NASDAQ:AAPL) describes two sides; one is the expectation and the other is the real prospects. There is no doubt that the expectations for Apple are quite low for CY13.
Expectations are mostly based on emotions and in the investment market they are the big wheels. Currently Investors are of the mind that iPhones will not be able to sell this year, they will be “relatively flat”.
Another thing, which many experts are looking forward to as it may become ‘make or break’ for Apple Inc. (NASDAQ:AAPL), is their move into the TV sector. Investors aren’t exactly rolling out the red carpet for it; they fear that even if Apple makes the move it won’t be enough to have a significant impact.
Despite the fear and nerves, all calculations point to an increase in the sales of iPhones this year. According to Barclays Plc (LON:BARC) (NYSE:BCS), estimates of iPhone sales can still grow by 20% in the years to come, at the same time, Morgan Stanley estimates that iPhones will grow by 27% a year from now.
In my opinion the real make or break for Apple this year is how successfully they will upgrade their web services. Their iOS 7 desperately needs more features. Arguably one major factor that dragged down the share price for Apple was their attempt at Apple Maps. Unfortunately it made users question, ‘does Apple have the ability to compete in web applications?’
Doubts were created that Apple Inc. (NASDAQ:AAPL) can’t deliver in web services. But Apple can turn this into an opportunity. They can surprise the users with some amazing web service apps; iOS-led television services, plus improvements in their iCloud can in fact put rockets in their share price. It is the question of Apple’s ability to innovate and captivate the audience.
There is another aspect to these web based services, they are subscription based and generate perpetual income. As soon as the investors are convinced that Apple has in fact a high switching cost (particularly in iOS subscription area) they will be back to buy Apple.
Should the Sell Side be Pessimistic about Apple?
Many institutes (including Barclays) did give Apple Inc. (NASDAQ:AAPL) high December quarter estimates but lowered them in the long term; there is a ‘mix’ of iPads and iPad Minis now. For the first quarter Apple will do just fine; 1Q13 estimates for EPS are $13.38 (previous estimate was $13.00). This first quarter estimate is based on 17% y/y revenue growth to $54.0 billion (previous estimate was $52.4 billion).
This might create short-term high hopes but fiscal year 2013 estimates have been lowered. The EPS estimate has been downgraded to $49.00 from $50.92 – based on 25% y/y revenue growth, reduced to $194.8 billion from $196.1 billion.
With these new, lower estimates Barclays PLC (LON:BARC) (NYSE:BCS) puts the price target on Apple Inc. (NASDAQ:AAPL) at $740, a considerable (8%) reduction from their previous estimate of $800. The growth prospects are bright, given the company's history and how it has smashed through the clutter with brilliant products. Apple has proven that it can still be the leader in disruptive mobility.
Another thing that might make Apple a favourite for investor is the current share price, which should be very attractive for investors (the price target of $740 uses a market multiple of 13.0x and that puts the EPS for FY14 at $57.45).
BTIG downgraded Apple FQ1 EPS by $1.65 to $14.00 – gross margin assumptions were low (although their revenue estimate does increase in the first quarter by $2.2 billion to $56.2). This downgrade spans over the entire year; their F2013 EPS is down by $4.00 to $46.00.
Apple – Overweight
At a price target of $740.00 (from Barclays), why is Apple Inc. (NASDAQ:AAPL) overweight? Apple’s valuation is attractive, there is no question about it. It is only common sense to assume that with stronger growth in iPhones, iPads, Macs, the share price will get a boost. The growth in sales has been projected for years to come so the shares continue to find support.
In fact Apple stands out in the tech profit pool. It has a higher multiple (at least it deserves a higher multiple) versus the competition.
The Upside Scenario
Apple has the potential for tremendous organic growth. I know that the term ‘potential’ is been overused in the business industry but from whichever perspective you analyse Apple Inc. (NASDAQ:AAPL) they do have a lot of it. Phones, tablets and Macs are almost guaranteed to bring in huge profits for Apple. According to Barclay’s estimates Apple’s upside case is $860 – an estimate of 15x of FY14 EPS of $57.45.
The Downside Scenario
With 7x of the FY14 estimate of EPS $57.45, the downside falls to $400. The reason is the most obvious one (and by no means particular to Apple); cut throat competition and margin pressures.
The growth estimates of 20% in iPhone sales are based on one premise; IF the company can successfully expand the product line.
Flicker is an online image hosting website and according to its owner it has over 51 million users that post around 4.5 million photos daily. This huge user base deems iPhone 4S as their most favorite device for taking and uploading pictures. To make things easier for users, Apple’s iPhoto is integrated with Flicker and has an app for it.
The next device that will probably take the number one spot at Flickr also belongs to Apple; the iPhone 5, the way it surpassed Samsung's Galaxy S III is really something! The fifth generation iPhone has faster shutter speeds and superb panoramic features. Gains in Apple’s shares will increase as iPhone 5 usability increases.
The App factor
I don’t understand why ‘Apple-bearish’ people don’t consider the power of Apple apps? This factor really beefs-up Apple against peers. The App store is the perfect catalyst that will keep the users hooked on iPhones, iPads and iPod Touch – an edge over Android devices.
Apple apps offer considerable customization that makes users not want to switch to other devices. Fortunately for Apple Inc. (NASDAQ:AAPL), the competition is not yet reached this level.
Another factor in Apple's favor is its apps. When purchased over cellular networks, this translates into high usage characteristics for iPhones. Users tend to buy data plans, which gives Apple high subsidies from the carrier services – meaning high margins for Apple Inc. (NASDAQ:AAPL) in the long run.
After the misadventure of Apple Maps, people started raising eye brows over Apple’s web services. But here’s the interesting thing; Google Maps went back on iPhones on December 12 and it jumped to number one as the most downloaded application; within the first 48 hours, it got more than 10 million downloads.
So who wants to throw in the towel on Apple?