Apple Inc. (AAPL) Q1 Preview, And The China Opportunity

Apple Inc. (AAPL) Q1 Preview, And The China Opportunity
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Apple Inc. (AAPL) Q1 Preview, And The China Opportunity

Apple Inc. (NASDAQ:AAPL) reports quarterly Results on January 23rd. While some firms have lowered their forecasts, analysts at RBC are forecasting a strong quarter.  For F1Q13, the analysts at RBC expect revenues / EPS of $57.2bn (+59% qoq/+23% yoy)/$14.59 vs. consensus at $54.6bn/$13.34. With strong iPhone 5 shipments they expect possible upside to their gross margin estimates of 39.3%. Their CY12/CY13 EPS estimates stand at $44.88/$60.36. Apple Inc. (NASDAQ:AAPL) remains well positioned with a privileged advantage in the compute market and will be able to maintain momentum across key product lines driven by continued innovation in hardware, software and services. As such, they are reiterating their outperform rating and price target of $750.

We summarize the details below:

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Supply chain noise or end demand weakness, RBC thinks more of an adjustment.

The analysts believe that the recent and consistent reports of iPhone order cuts are on balance accurate (i.e. that builds may fall 30-40% qoq in Q113). However, they also believe that they are not reflective of end demand and are evidence of Apple Inc. (NASDAQ:AAPL) ramping its supply chain more aggressively than the past as the product cycle accelerates. Specifically, the analysts believe strength in smartphone shipments at Verizon Communications Inc. (NYSE:VZ), AT&T Inc. (NYSE:T) a decent launch weekend in China supports their 49.8mn estimates up 85% qoq and 34% yoy. They are projecting above consensus iPhone volumes of 138mn/192mn for CY12/CY13 driven by high end smartphone growth and the scope for Apple to add additional carriers.

Speaking of China, Goldman Sachs is out with a 35 page report about Apple Inc. (NASDAQ:AAPL)’s opportunity in the country.  Goldman believes that there are certain adjustments that Apple can make in order to maintain momentum in emerging regions. These adaptations largely involve lowering the device acquisition cost, but there are different ways of doing so. They list three major points:

  • Discounting prior-generation products. Observers long feared that Apple’s product prices are too high to be accessible to broad portions of the population in emerging regions. This was especially a concern for the iPhone, since many such regions also lack substantial carrier subsidies to help cover the consumer’s upfront smartphone acquisition costs. Rather than cut prices across the product line, Apple has reduced the list price of prior-generations of iPhones (and iPads), to the point where prior devices can be obtained for free with a carrier contract (or at a substantially lower price even without). This increases the product portfolio’s market coverage and extends product lifespan, while helping the company preserve margins throughout.
  • Introducing more products at the low end. Lowering prices on prior-gen products can be an effective discounting strategy, as it was in the case of the iPhone. This isn’t always enough, and sometimes the product family is best off being expanded in order to get greater market coverage. Looking back years ago, the company did this when it introduced the nano and shuffle to the iPod product family. A more recent example is, of course, the iPad mini. The trick to pulling this off is that the lower-end products must still be compelling enough to be additive to the ecosystem. With the launch of the iPad mini, for instance, Apple design chief Jonathan Ive stressed that it wasn’t just a smaller version of the iPad. In his words, it’s a “concentration of—not a reduction of—the original”. Goldman believes that Apple will follow this strategy in smartphones with the eventual launch of a much more affordable wholesale price for the device.
  •  Pulling for richer carrier subsidies. Carrier subsidies, which play a substantial role in the US market, are less common in emerging regions. GS communication services analyst Jason Armstrong estimates that in the US, about 75% of wireless subscribers have post-paid plans (involving subsidies), and this is generally understood to be above the worldwide average. In contrast, the vast majority of wireless subs in China are likely on prepaid plans. As such, Apple Inc. (NASDAQ:AAPL)  has worked with carriers to arrange post-paid plans for iPhone buyers, in some cases convincing them to launch their first significant post-paid plan.

iPad – continued strength through platform dominance

RBC analysts forecast 23.8 mn iPad units (70% qoq/+55% yoy) in F1Q13. Within the competitive landscape, they forecast Apple’s tablet share at ~59% in 2013 and ~50% long-term, though this may prove conservative given the company’s compute advantage, aggressive pricing and superior margin structure.

Valuation remains attractive.

Trading on a P/E of ~8x of the analysts’ CY13 EPS estimate of $60.34, Apple Inc. (NASDAQ:AAPL) ‘s valuation remains attractive given earnings CAGR of 25% between CY11-13E, LT EPS power of $75, and net cash of $128/share.

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