Apple Inc. (AAPL) Is Beating Samsung, Now Is The Time To Buy: MS

Apple Inc. (AAPL) Is Beating Samsung, Now Is The Time To Buy: MS
ElisaRiva / Pixabay

Many firms have downgraded Apple Inc. (NASDAQ:AAPL), and investors are having serious doubts about Apple’s share price. The competition is  growing on Apple and the fear is that the company can’t innovate their way out of this peril. However, many investor’s concerns will be alleviated if Apple Inc. (NASDAQ:AAPL) performs exceptionally well in China and meet its sales target.

Apple Inc. (AAPL) Is Beating Samsung, Now Is The Time To Buy: MS

Jerry Liu and Katy Huberty at Morgan Stanley (NYSE:MS) find it surprising that iPad sales are stable at 50%, something they were not expecting. Their earlier projections indicated a drop in sales. Their recommendation is to own “into early 2013” because it’s going to soar. Mizuho Securities are not very positive about Apple Inc. (NASDAQ:AAPL), especially with Apple’s ability to meet the sales target in March Quarter.

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Great December, doubtful March Quarter

Mizuho Securities has serious concerns about Apple’s March quarter shipments. They believe Apple will face a 10% sequential downtick in revenues during this time. They also think Apple will fall short of their 50M units of iPhone sales – they put the figure below 40M units, which will put a serious dent in the company’s revenue pool. For these reasons, they lowered target price for Apple from $750 to $600.

Great December, Doubtful March Quater Chart

Mizuho are not optimistic about future sales, but they do agree with Morgan Stanley (NYSE:MS) about the December quarter. There has been tremendous penetration of smartphones in the US, but iPhone 5 stood its ground. In C4Q12, iPhone met its projected sales. But more importantly the high priced iPhone 5 is still in the shopping lists of many consumers.

Consumer reaction reports that iPhone 5 has even better prospects than iPhone 4S, the C4Q performance (of 33% growth) matched their forecasts. As a consequence Morgan Stanley believes that 50M unit (+35% y/y) and $642 (-4%) ASP assumptions in C4Q won’t just be a dream for iPhones.

Apple resilient against Samsung

Samsung Electronics Co., Ltd. (LON:BC94) shares are rising, but that is at the expense of other Android devices not the iPhones. iPhones purchase is also expected to rise 4 points in the year 2013.

Apple resilient against Samsung Chart

Apple’s Investment Case    

Morgan Stanley (NYSE:MS) believes that “AAPL shares discount a significant deceleration in revenue and earnings growth”, which they find is unjustified, given the fact that Apple has some greats products to offer in 2013. Apple Inc. (NASDAQ:AAPL) came out as the clear winner of the December 2012 holiday season, it would be unfair to assume that they can’t do it again.

Short term catalyst

The high priced iPhone 5 with LTE has all the prospects for a brilliant upgrade in 2013. Forecasts point to the fact that sales for iPhone 5 can go up in 2013. Fourth generation iPad and the Mini also met their sales forecasts, and it’s hoped that they will do the same in 2013 – Mix shift to iPhones and iPads will drive margins higher.

Long term catalyst  

Apple Inc. (NASDAQ:AAPL) is moving aggressively towards expanding stores, its online presence and carrier deals in places like China and Brazil. Apple is currently the leader in the tablet market, plus it has all the big guns in the app sector; continued dominance here can bring home the crown. Plus if the Smart TV is launched, it can be a long term catalyst for Apple.

Investment Risks

Some risks as identified by Morgan Stanley;

a)   The struggle for dominance by Android and Windows can turn things ugly for Apple.

b)   The ever stretching ‘replacement cycles’ from carriers can make things difficult. As smartphone market matures, there is more and penetration in it, which means smaller subsidies for Apple.

c)    Global consumer demand is lowering due to extreme competition. It is not the case only with Apple, every tech company is facing the music.

Share Price

The Upside Case – $980 (14x CY13e EPS $70)

Apple Inc. (NASDAQ:AAPL) maintains the upper hand by lowering iPhone and iPad prices, and by selling more units. This bull case scenario can become a reality if they do really well in China by lucratively synergizing with Chinese carrier services. Apple’s revenue is forecasted to grow by 37% for 2013; courtesy 210 million iPhone and 120 million iPad sales. The revenue generated by this mix of iPhones and iPads would result in a gross margin of 44.4%. The P/E multiple of 14x has been adjusted for Apple’s $121 billion cash and is in line with the average P/E of peers like; QCOM, SAP, ORCL and IBM.

The Base Case – Price Target of $714 (14x CY13e, EPS $51 / 10x P/E)          

This will ensue if Apple Inc. (NASDAQ:AAPL) maintains its market share of phones and tablets, but its China deal doesn’t hit a home run, plus its TV project doesn’t live up to expectations. This base case materializes when 175 million iPhones and 88 million iPad sales result in a revenue growth of 20% in 2013 (which is still better than 2012’s performance of 138M and 63M). If iPads and iPhone sales remain stable, the improved margin can reach 41% (much better than 37% from previous year). The base case P/E multiple is the same as for the Bull case; 14x, after $121 billion outstanding cash balance adjustment.

The Downside Case – $495 (11x CY13e, EPS of $45)

The condition that can push Apple Inc. (NASDAQ:AAPL) this way is if Windows 8 does exceptionally well and Apple starts losing its market share. Consequentially, Apple will have to sell its products at lower margin in emerging markets. Small growth in revenue and deceleration in growth margin will limit EPS growth; competition and growth concerns will put tremendous pressure on P/E multiple.

Proof that Apple can still grow in the US

Last year Apple gained a larger handset subscriber share and now it looks good to score more shares in 2013. iPhone users increased 20% in December 2012 from 13% in the previous year. This info nugget is important as many investors are of the mind that Apple has reached saturation point in the US.

iPad, iPhone sales in line with the estimates

This is a huge plus for Apple Inc. (NASDAQ:AAPL). The market has been penetrated tremendously; one-third of respondents now own a tablet. Given the market situation Apple’s brand loyalty comes into play as Apple’s tablet sales will stay strong in 2013. However, this makes Apple be a hinder in the tablet market growth as Morgan Stanley (NYSE:MS) expects the tablet market to replay 2012.

Survey suggests a 23% growth in iPad shipments from December 2012 to June 2013; this means a total of 41% growth in iPad sales for 2013. The iPhone’s story is not so different either. Both Evercore Partners Inc. (NYSE:EVR) and Barclays PLC (LON:BARC) (NYSE:BCS) believe that both iPhones and iPads will be fan favorites. Barclays believes that Apple can enjoy 20% sales growth in iPhone for a few years.

New Barclays iPhone Model-chart

iPad iPhone sales in line with the estimates chart

At the moment Apple Inc. (NASDAQ:AAPL) share price is not doing well in the market. Criticism is being fired from everywhere and by everyone, however, if they succeed in meeting the target of 50 million iPhones this year, it will be an orthodox example of ‘actions speak louder than news’.

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