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Needham downgrades Apple stock on technicality

post #1 of 16
Thread Starter 
Needham & Company downgraded their assessment of Apple stock from a "strong buy" to "buy" rating Tuesday, as a result of the firm's own rules for ratings, but not a change in their positive outlook for the stock.

The rating change means little, as Needham & Company still has high hopes for AAPL stock and is recommending that investors buy, analyst Conor Irvine told AppleInsider.

"The fundamentals are in-tact and our model hasn't changed at all," he said. "It was pretty much just a technicality."

Needham announced the change Tuesday afternoon, when shares of AAPL were worth $206.64 at 2 p.m. during intraday trading. At that price, 15 percent growth would place the stock higher than the firm's price target of $235. It is Needham's own rules, the company explained in its note, that required Apple stock to be downgraded from "strong buy" to "buy."

"On September 15th, based on stronger than anticipated sales of the iPhone, we raised our Apple price target from $200 to $235," the note issued to investors said. "Apples share price is now less than 15% higher than our price target, which represents our (admittedly arbitrary) breakeven rule for assigning buy and strong buy ratings to stocks in the absence of any change in a companys fundamentals. As a result, we are downgrading Apple to Buy from Strong Buy, and maintaining our $235 price target."

The firm noted that checks indicate that Apple's first fiscal quarter is on track to meet or exceed expectations of $1.77 earnings per share, even before the holiday buying season has begun. Needham said they intend to revisit their valuation model for Apple in January, when the Cupertino, Calif., company reports the results of its first financial quarter.

Irvine said that Needham had a choice between upping the price target for the stock, or lowering its rating from "strong buy" to "buy." The company's rule requires that there be 15 percent upside at a stock's trading price to qualify for a "strong buy" rating. And where Apple stock is currently trading does not warrant that ranking.

Graphics via Needham & Company.

Needham's rules would have required the price target for AAPL to be increased to nearly $238, based on where the stock was trading Tuesday afternoon. But while Needham is reluctant raise its estimates higher, some have projected a much greater price or the stock.

UBS Investment Research's Maynard J. Um has predicted Apple will hit $280 in the next 12 months, and analyst Gene Munster with Piper Jaffray has a price target of $277 for Apple. In addition, analyst Mike Abramsky with RBC Capital Markets has forecast that AAPL will hit $275 in the next year.

Tremendous growth in recent years has caused the Mac maker's market value to swell to $180 Billion. But Apple's market cap would reach a whopping $250 billion as if its stock were to hit $280.
post #2 of 16
Nothing to see here. Everybody just move along...
Progress is a comfortable disease
--e.e.c.
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Progress is a comfortable disease
--e.e.c.
Reply
post #3 of 16
<<yawns>>
post #4 of 16
Needham should commended for actually giving a hard set of rules for its ratings.
post #5 of 16
Quote:
Originally Posted by cameronj View Post

Needham should commended for actually giving a hard set of rules for its ratings.

Setting Price targets are useless, baseless and manipulative.
post #6 of 16
Time to break the Microsoft net worth barrier/milestone
post #7 of 16
Wait, are they saying that "Apple is doing better than predicted, let's downgrade it so less people buy it so we're right?" Talk about egos...
post #8 of 16
Just a bunch of stupid people predicting the future, so they will be the beneficiaries.

Plain idiots.
post #9 of 16
Quote:
Originally Posted by cameronj View Post

Needham should commended for actually giving a hard set of rules for its ratings.

While I agree with the other commenter that price targets are somewhat meaningless, as the "track record" of analysts is not so good, I agree, give them credit for at least observing their own protocol and calling it for what it is, somewhat arbitrary.
post #10 of 16
Quote:
Originally Posted by bartfat View Post

Time to break the Microsoft net worth barrier/milestone

My position on MSFT remains unchanged: STRONG SELL.

Not much to downgrade there.
post #11 of 16
Quote:
Originally Posted by Samnuva View Post

Wait, are they saying that "Apple is doing better than predicted, let's downgrade it so less people buy it so we're right?" Talk about egos...

I agree with them, to an extent. There was a stronger reason for me to buy last year, because my stock doubled in value. Since AAPL will supposedly peak at $235, investments now are safe, but won't make the same profits.
post #12 of 16
Quote:
Originally Posted by eat@me View Post

Setting Price targets are useless, baseless and manipulative.

Not entirely. While they are an over-simplification of an over-simplification, they try to be an easy number to balance intermediate-term earnings expectations, long-term growth expectations, and the premium people are willing to pay for a given stock.

They are useful as they show the general upside potential that an analyst thinks there is over the next 9-12 months. They are based on varying levels of insight and research into a company and its performance.

One could argue that they are manipulative, but only if you try and simplify the stock market as a whole down to a simple target price.

---
Now, as for the accuracy of Needham's price target... well, I would say that it is pretty weak, as it was when they issued it. Consensus EPS for FY10 is $7.78 vs $6.29. My expectation is that $8.49 is more reasonable for FY10, and worth a PE of about 35. In my book, that puts Apple at $297 in 12 months.

Since my PE is just equal to my growth expectations, I would likely agree with their 15% upside for a "strong buy" recommendation. In a booming economy they should have a PE closer to 55-70.

Now... analysts on the other hand are a worthless breed. How much insight does anybody foisting off numbers really have?
post #13 of 16
Quote:
Originally Posted by yodie View Post

I agree with them, to an extent. There was a stronger reason for me to buy last year, because my stock doubled in value. Since AAPL will supposedly peak at $235, investments now are safe, but won't make the same profits.

Only if you believe that price. They are forced to if they don't allow for more frequent updates. I'd still say there is easily 40-50% upside when looking at current earnings estimates.
post #14 of 16
They have to downgrade it, don't they? If they don't downgrade it then they won't have a way of artificially depressing the stock so they can recommend their customers to buy more at lower prices, or short it based on their bogus analysis.

Proud AAPL stock owner.

 

GOA

Reply

Proud AAPL stock owner.

 

GOA

Reply
post #15 of 16
Quote:
Originally Posted by eat@me View Post

Setting Price targets are useless, baseless and manipulative.

Sure, but so are ratings. At least this way they are consistent. How many times have you seen someone with a strong buy on a stock and a "target" only slightly higher than the current price? Or a hold on a stock with a target below the current price?
post #16 of 16
Quote:
Originally Posted by aaarrrgggh View Post

Only if you believe that price. They are forced to if they don't allow for more frequent updates. I'd still say there is easily 40-50% upside when looking at current earnings estimates.

But if YOU know that earnings estimates are low, so does the market. And thus, the stock is already up where it should be given what "everyone" knows about current earnings estimates.

This is why individual investors so often are surprised by stock moves. They don't understand that their little inside knowledge about a company really isn't inside, everyone knows it, and the stock already reflects it.
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