Apple Inc. – Potential Buy On Weakness Because Of China Mobile

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Apple Inc. (NASDAQ:AAPL) shares declined more than 7% after the company’s earnings report this week, but Stifel analysts say there’s nothing to fear. In fact, they remain Buy-rated with a $650 per share price target on Apple stock after the weakness which resulted from those results, based on the continued possibility of upside from the deal with China Mobile.

Apple’s guidance causes concern

Of course investors were worried about the fact that Apple Inc. (NASDAQ:AAPL) didn’t ship as many iPhones as they had hoped during the December quarter, but the guidance provided by the company has also caused concerns. Stifel analyst Aaron Rakers and his team said they have questions over the ramp-up of sales through China Mobile because of that guidance.

In spite of their questions, they still believe China Mobile represents meaningful upside for Apple. They have simply dialed back their expectations because they see Apple’s ramp-up with China Mobile as being “heavily tied” to the carrier’s build-out of 4G LTE. This means the ramp-up could take longer than previously expected.

Rakers and his team note that Apple Inc. (NASDAQ:AAPL) returned to growth in China during the December quarter, reporting a 30% year over year growth in revenue and a 20% growth in iPhone shipments in the region year over year. In addition, the company’s iPad shipments in China grew 64% year over year in the quarter.

Other positives for Apple noted

The analysts also pointed to Apple Inc. (NASDAQ:AAPL)’s better than expected margins, which were ahead of its own guidance, coming in at 37.9%. They say Apple continues to be able to “favorably work down the cost curve,” which drove margins higher. They also continue to view Apple’s free cash flow generation as a big positive, noting it was about $45.1 billion on a TTM basis.

They also said Apple Inc. (NASDAQ:AAPL) continues to hint at upcoming new product categories to be introduced over the next few quarters, although investments in research and development aren’t currently visible in the company’s revenue.

Dialing down expectations for Apple

Apple Inc. (NASDAQ:AAPL) guided for March quarterly revenue to be between $42 billion and $44 billion, compared to their previous estimate of $44.1 billion and Wall Street’s even higher estimate of $46 billion. The Stifel team said this has resulted in investors questioning this “as representing the most meaningful” sequential decline for the fiscal second quarter over the last several years.

Apple Inc. (NASDAQ:AAPL) guided for gross margins of between 37% and 38% and between $4.3 billion and $4.4 billion in operating expenditures. As a result of this guide, the Stifel team edged their earnings per share estimate for the March quarter downward from $10.58 to $10.37 a share. For the full 2014, they’re projecting shipments of 161.6 million units with an average selling price of $609.

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