What Is Eating Apple Inc. (AAPL) Stock?

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

Exclusive: York Capital to wind down European funds, spin out Asian funds

Jeffrey Aronson Crossroads CapitalYork Capital Management has decided to focus on longer-duration assets like private equity, private debt and collateralized loan obligations. The firm also plans to wind down its European hedge funds and spin out its Asian fund. Q3 2020 hedge fund letters, conferences and more York announces structural and operational changes York Chairman and CEO Jamie Read More

3) Supply-chain constraints

4) 2013 Tax Increases

5) Management Changes.

What Is Eating Apple Inc. (AAPL) Stock?

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.


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.