Wednesday, January 23, 2008

Color on quarter: Apple (NASDAQ:AAPL)

Almost all firms are out in defense of Apple (NASDAQ:AAPL) following yesterday's better than expected results but weaker than usual guidance:

- Piper Jaffray (the axe in AAPL!) maintains its Buy rating and $250 tgt saying yesterday's weakness is a buying opportunity. While the iPod numbers show continued deceleration in y/y growth, they believe the stock action is an overreaction for two reasons. 1) Mac market share continues to rise, and growth rates are accelerating. Using IDC estimates, Mac market share in Dec-07 was 3.0%, or 50 basis points higher than in Dec-06. This y/y increase ties the largest gain in Mac market share since we began tracking IDC data seven quarters ago. 2) Valuation gives support at these levels. Shares of AAPL are currently trading at 25x NTM EPS, the low over last 2 years is 24x and the 2-year average is 31x.

- Morgan Stanley maintains their Overweight rating noting key metrics were more positive than guidance implyed.

Both total company Mac and International revenue growth accelerated in December. Retail store growth metrics also improved despite tougher US compares and the expansion of non-AAPL retail storefronts. New products, low channel inventory and expanding BBY distribution (314 incremental stores in C1H) should fuel additional Mac growth in C1H08. While slower US-based iPod growth presents the one area of deceleration in the quarter, the firm already reflects this in their C2008 forecast.

- Goldman Sachs notes the nicks in Apple's December quarter - with Macs in line and iPods coming up short - together with current market sentiment, which punishes any blemishes, leave an overhang on the stock nearer-term. That said, Apple has fundamental and valuation underpinnings, which should allow the stock to outperform on an absolute and relative basis longer term, and they are maintaining their Buy rating.

As a result of strong Mac growth, increasing iPhone revenue, better gross margin, and a richer mix of iPods, they are slightly raising their earnings forecast for Apple despite lower revenue and iPod unit assumptions. EPS estimate for CY08 is now $5.40 (prior $5.37) and for CY09 is $6.70 (prior $6.57). New tgt is $175 (vs prev $220).

- Citigroup says the $15+ decline in AAPL shares in the aftermarket discounts a recession scenario.They are aggressive buyers on pre Wednesday-open weakness even though they recognize that potential yoy declines in iPod units during 1HCY08 may keep the shares range bound for several quarters.

AAPL shares now trade at just 16X F12 FCF excluding cash, an attractive valuation given expectation of 20-25% growth in FCF per share during the next two years. Citi's valuation analysis suggests a 12-month target of $212, ~50% above the aftermarket share price.

Notablecalls: I think AAPL is a bounce candidate today. The co is about the only tech stock that shows above average growth rates. The iPod weakness? With the iPhone on the market, who would have guessed, eh? Come on! @ $140 it's been discounted already

The main story here are the Mac's. That's where AAPL is making the most dough. And Mac numbers came in good.

You gotta buy AAPL for a bounce here.

6 comments:

roberta said...

thank you simon for your contributions in making some sense out of this market. even though I am coming to you from a different email address, this is your buddy steve coleman.

notablecalls said...

hey Steve!

fun said...

Gotta disagree this time. Most analysts defending AAPL cast aside something that in my opinion is important this time: Apple's own guidance. Yes, we all know the story how Apple always guides very conservative, how it beats official expectations and how good bounce candidate it has proven to be after AH sell-off. But I tend to think that this time it is different. At all previous times US consumers somewhat surprising strength has helped AAPL to beat it's forecasts, but it very well might not be the case in Q2 2008.

Another thing that is pointed out: weak revenue from iPods is not critical as Macs are selling well. Wasn't actually the direction change from computers to "fancy consumer goods" the reason why AAPL once bumped off the ground at all? Now, when iPods revenue is disappearing they again say that AAPL actually is a computers producer. Doesn't convince me. And isn't worth a higher multiple than others in this case.

The HardHead Fund said...

iPods slowing - duh of course! But no one mentioned the profits they were getting off of the iTouch sales. Who cares if they didn't sell 23 million? What should matter is the Rev growth in the iPod division. Did anyone take a look at the half billion in deferred Rev... of course not! No one has figured out how to track it in their models. Apple will be +250 Jan 08 recession or no recession!

ivanTheTerrible said...

Less iPod sales, more iPod revenue. Less shuffles, more touch sold. 220 by September.
Mac users never go back to Win/PC. 50% of Macs sold to first time buyers. In 3-5 years they will all come back to Apple for a new machine. A company with no debt, with this kind of outlook. 500 by December 2009.(very conservative!)

notablecalls said...

one for the bears, it looks like.