Tuesday, July 22, 2008

Apple (NASDAQ:AAPL): Colour on quarter

Several firms are out with comments on Apple (NASDAQ:AAPL) following results out last night:

- Piper Jaffray maintains their Outperform and $250 tgt saying that while the focus today will be anxiety over gross margin, they expect by the end of the September quarter, the Street will likely look past margin guidance and focus on product transitions, along with the positive impact these products will have on revenue growth.

What is new is Apple guided to a 30% gross margin target for FY09, compared to PJ's previous estimate of 32.3%. Firm believes there are two reasons for this guidance. 1. Apple will slightly lower its pricing on existing products 2. Apple typically guides GM 270 basis points below the previous quarter's actual GM.

They believe Apple is readying new iPods and new portables that will apply downward margin pressure in the Sept. quarter and into FY09. We believe there is an 80% chance Apple will introduce redesigned MacBooks and possibly new MacBook Pros at lower price points. Specifically, Apple may re-enter the $999 price point (currently $1099)with the MacBook, or test the $1,799 price point with the MacBook Pro (currently $1999). In addition, PJ expects slightly redesigned iPods in the Sept. quarter, with lower-cost touch-based iPods for the holiday season. They believe Apple is getting slightly more aggressive with its pricing; but overall the company is not diverting from its strategy of premium pricing.

- Deutsche Bank notes AAPL beat expectations with revs of $7.5B & EPS of $1.19 (vs. DB at $7.4B & $1.06, Street at $7.4B & $1.08). However, concerns surrounding Steve Jobs' health and weak guidance (GMs of 31.5% in Sep Q and ~30% in FY09) overshadowed results and could likely pressure the stock in the NT. They expect AAPL to oscillate around current levels while investors digest current guidance and await improved visibility into new product refreshes (iPods and Macs) in C3Q. As a result, they lower their estimates and PT to $200 (from $235); maintain Buy.

Regarding Steve's health, mgmt said 'he has no plans to leave Apple and his health is a private matter'. While the topic is delicate, they believe the absence of a straightforward denial of health issues will increase speculation of a worst case scenario. Further, weak guidance (GM's of 31.5% for Sept Q) suggests softening end market demand with lower pricing required to drive share gains (iPods/Macs).

- Oppenheimer notes Apple reported respectable F3Q08 results--as if that mattered. The real news last night was Apple's forecast of a 350bps drop in gross margin in FY09.

Apple attributed the knee-capping to an upcoming product transition, the details of which remain shrouded in the typical cone of silence. So the obvious question is: what magnitude of product innovation (and revenue upside) would propel Apple to sacrifice so much profit?

Opco's guess: something big. While product details and the appropriate growth adjustments will emerge over time, we note that innovation has always been the key to Apple's growth and premium valuation. As such, they'd see a near-term pull back as an opportunity to re-enter Apple on a new ground floor. Reiterates Outperform rating.

- Morgan Stanley notes that while they believe last night’s move in AAPL shares presents an attractive valuation entry point (~$146 = 20x FY10 P/E, ex-cash, and just 0.7x earnings growth), they believe AAPL will remain in this range (and potentially trend lower) until we approach new product introductions in September.

Notablecalls: I'm not buying AAPL here around $150. I continue to suspect the iPhone will be a fad that will cannibalize the iPod opportunity (notice how iPod ASP's took another step lower). Mac's continue to be strong lending strong support to overall results. Yet, it looks like pricing there may be going lower too. That's rarely a good thing.

The matter regarding Steve Jobs' health continues to be a overhang as well. It is reported he is getting thinner and as we know cancer tends to return. Yesterday's conf call comments regarding his health did little to dispel these fears.

We may see a bounce early on but I suspect there is another 10-15 pts worth of downside risk in the stock here.

Yes, new products coming in Q3 may be interesting but what are the chances we will see a repeat of iPod/Mac or even iPhone. Kinda slim, no?


roberta said...

where is it reported steve is getting thinner? what a ridiculous comment.

Timothy Hussar said...

uh oh, get ready for the fan boys to jump all over you...something tells me they're a little pissed this morning

notablecalls said...


James Burger said...

Hey I'm a Fanboy!
But what is happening here is the "Bear Bust"
Apple comes in with really good numbers and tanks.
Rimm came in with really good numbers and tanked.
The 'Four Horseman' have been thrown from their horses and are getting trampled.
I'm long on Apple but NT am shorting stock

The HardHead Fund said...

Business as always at APPLE - the CFO could do wonders for Apple investors if he simply kept his mouth SHUT and reported no guidance as Daddy GOOG. I have never been a fan of short tern guidance and it is simply a tool for management to obtain a bonus for meeting expectations. Time to get ready for a proxy fight at the next meeting - REPORT NO GUIDANCE!

All the technicals are in place for a +$200 stock - wish I could take the CFO out behind the barn for some guidance!

HH - still long and crying

notablecalls said...

Yo Apple fanboys. I was wrong. Take your shots.

The HardHead Fund said...

Im not taking a shot. You have been right more than most I follow... keep up the fight.


Win said...

Hey NC, I sold Apple yesterday morning for a nice big loss, I agreed with you; haven't yet understood the reversal. That was pretty big - says a lot about not just AAPL but the market. This market has turned.

The HardHead Fund said...

So I lied - I forgot your post - "I continue to suspect the iPhone will be a fad."

Hold on there - FAD? The iPhone will become "one" of the best products of the century. People forget this little gadget has a "REAL" operating system. The real test will be when they add more little gadgets to this hand held communicator... it blows away the one in Star Trek.

When I discovered the patents a few years ago - that's when I loaded up the truck!

People you really have no idea what this "little thing" is going to do! My money is where my mouth is.


KC said...

Two things: one, after 5 years, cancer specialists declare a cancer patient cured, and Steve is almost at the 5 year mark. It's more and more unlikely for recurrence the further away he gets from the initial diagnosis. Two, what are the odds of another iPod or iPhone? Have you considered an iPad or iDevice? A hybrid of a tablet and a phone? You know, something slightly larger than the iPhone? Something that is a full-fledged Mac that can run desktop apps, but is also a mobile device?

The HardHead Fund said...

I have been fighting cancer for about one year now so I have a little knowledge in the area. I agree with KC in regards to Jobs status. Jobs had pancreatic cancer - one of the worst types to get. 95% do not live very long. Due to Jobs surgery they removed body parts that cause several digestive problems which will remain till he passes away (10-20 years).

What are the odds of another KILLER GADGET like the iPhone & iPod from Apple? I say they are pretty damn good if you follow all the patents Apple has applied for the last 5-6 years. I expect the patent office to get tired of Apple for submitting so many :)

Long live Jobs (and NC) - I'm waiting for more anti-Ballmer attacks!

the finance ninja said...

notable calls, you saying the ipod or iphone is just a fad is a bit wrong. when young people are pyched about writing software applications for the iphone that says a lot. selling millions the first weekend means a lot. granted i can agree that after it bounced to $146 investors sure weren't happy, but it bullishly went right back to 167. i've traded puts on it twice profiting after earnings because historically for almost 20 years the stock has dropped because it has worriesome big drama investors.

but i definitely see lines of people buying products at the stores. that means growth, a lotta growth on products. they are trying to convert ipod users to buy the iphone. all in one.

i'm not an apple fan, but a fan on its volatileness around earnings and up to product launches. i'll surely be in apple option calls once the drama is over or the trend becomes stronger.

one stock i don't get at the moment is NTRI. it is way under its 200 DMA so i could be totally wrong on PUTs with a peg of .46 but the last time it was .67 something the stock has fallen the entire year. i think its going to hit $13 again, but a trend is building on the 233 minute chart. so who knows....i'm clueless at least.