Goldman Sachs Group, Inc. (NYSE:GS) kicked off its Goldman Sachs 2013 Technology and Internet Conference in San Francisco on Tuesday and today, analysts wrote the research report, "Tech & Internet Conference Day 1 recap: bullish tone to start 2013."
Analysts said its attending companies appeared cautiously optimistic that the demand environment has stabilized. They were all positive on their ability to capitalize on long-term opportunities from trends including mobility, big data and cloud.
From the demand environment, QLogic Corporation (NASDAQ:QLGC) and SYNNEX Corporation (NYSE:SNX) noted stabilization in overall demand. At the same time companies such as Apple Inc. (NASDAQ:AAPL), International Business Machines Corp. (NYSE:IBM) and Fusion-IO, Inc. (NYSE:FIO) focused on growth opportunities through TAM expansion, share gains and emerging market penetration.
Capital allocation was also a focus with Apple Inc. (NASDAQ:AAPL) and appears much more flexible in returning additional cash to shareholders.
Here's an additional summary from Day One.
Secular shifts in focus
Outside of the macro backdrop, most of the presenting companies focused on capitalizing on the long-term secular trends underway in the technology industry with Apple, SYNNEX Corporation (NYSE:SNX) and Tech Data highlighting mobility as a key growth engine, International Business Machines Corp. (NYSE:IBM) seeing opportunities in analytics, Fusion-io and QLogic focused on flash and storage growth, and Xerox Corporation (NYSE:XRX) looking at continued services expansion.
Most bullish on CL-Buy for Apple
Apple Inc. (NASDAQ:AAPL) CEO Tim Cook did not offer any specific news on neither the company’s capital allocation intentions nor new product strategy, as expected. Analysts believe the tone of his commentary suggested increased capital allocation is likely and that the company was more flexible on expanding its product lines and covered price points. The company also appeared remarkably confident in its incremental growth opportunities and innovation pipeline.
Analysts reiterated CL-Buy and 12-month target price at $660.
Industry thesis remains unchanged
Analysts continue to believe investors should focus on secular winners. CL-Buy Apple and Buy-rated EMC Corporation (NYSE:EMC) remain as the top picks in the sector. In addition, analysts believe Buy-rated International Business Machines Corp. (NYSE:IBM) remains an important counter-cyclical component for technology portfolios amid the currently volatile macroeconomic environment.
Analysts wrote the following additional notes from Cook's presentation. Here at ValueWalk, we wrote in more details about Cook's presentation. Even Apple guru Gene Munster liked what Cook had to say on Tuesday.
Cook on capital allocation: Cook noted that the company will continue to heavily invest in R&D, new products, the supply chain and acquisitions. However, he stressed that Apple Inc. (NASDAQ:AAPL) is in a position to seriously consider returning additional cash to shareholders, though it will be thoughtful and deliberate.
In response to the recent Greenlight proposal for perpetual preferred stock, Cook noted that the company will consider it, though he was clear that Proposal 2 on its recent shareholder ballot did not preclude the issuance of such a security, but rather just required a common shareholder vote.
Cook on innovation: Cook noted that he has never been more bullish on innovation at Apple. Innovation is deeply embedded in the culture of the company, with Cook attributing it in part to leadership and innovation on multiple spheres.
In particular, Cook highlighted Apple Inc. (NASDAQ:AAPL)'s ability to simultaneously innovate on software, hardware and services, which enables the company to deliver a truly elegant and integrated experience for consumers relative to its competitors that can only do one of those components. While skeptics have doubted the benefits of vertical integration over time, Apple continues to believe in controlling the primary technology in its products.
Cook on new SKUs and price points: Cook did not give any specific indication of new product plans, but the company appeared much more flexible in its willingness to expand its product lines and covered price points, noting that the only thing Apple would never do is to make "a crappy product."
Cook reminded investors that Apple Inc. (NASDAQ:AAPL)'s TAM expansion has not always been driven by the addition of SKUs within a product family (such as the addition of the shuffle, nano and touch to the iPod family), as in some cases the company has addressed new price points and customers by creating entirely new markets (such as the iPad in response to demand for lower cost Macs).
While product innovation remains at the core of Apple Inc. (NASDAQ:AAPL)'s strategy, the company did remind investors that with regard to gross margins, the halo effect, Apple’s supply chain prowess as well as its ability to monetize software and services, act as buffers that are often under-appreciated by investors.
Cook on growth and share gains: With regard to the company's growth potential, Cook remained optimistic. The smartphone market is projected to double in three years and the company believes that all mobile phones will eventually be smartphones. Meanwhile, the company noted that the iPhone is currently only available to 50 percent of subscribers in the world.
In addition, the company continues to view its ecosystem as a key source of competitive differentiation, revealing that it has paid over $8 billion to developers to date. In the tablet market, the company pointed to the growth outlook for the market as well as the high usage of the iPad relative to other tablets. Indeed, the tablet market is attracting people who have never owned a PC on top of its increasingly apparent PC market cannibalization.
Finally, the company continues to expand in emerging markets, with the App Store now available in 155 countries, the iTunes Store in 100 countries, and iCloud in virtually every country. The company’s retail stores have also been key enablers of this growth, with the company noting that it now has over 400 stores and plans to add 30 more this year, mostly outside of the United States.
Goldman's takeaway from Cook's remarks: Cook showed the company is much more flexible than previously thought in considering returning cash to shareholders as well as on the product innovation front; analysts believe this is encouraging for the story after the recent sell off.
Analysts view the company's sticky installed base as a baseline for valuation support, and expect new products in the coming months (including a refreshed iPhone, a new iPad, and a lower cost iPhone) to reinvigorate new user growth. They believe Apple Inc. (NASDAQ:AAPL) could move towards shorter product cycles, which would minimize the volatility seen last year and add a key source of stabilization to the story.
The $660 target price is based on a 14X multiple on our CY2013 EPS estimate of $47.29. Key risks include delayed product cycles, supply chain difficulties, product price erosion, and a slower pace of product innovation.