Macs seen as Apple's only remaining growth driver
Investment bank BMO Capital Markets on Monday slashed its price target on shares of Apple Inc. to $140 from $160, saying it believes the company's three growth drivers -- the Mac, iPod, and iPhone -- have been reduced to just one: the Mac.
Given this notion, analyst Keith Bachman (formally of Banc of America) advised clients in a research note that Apple shares now carry a higher risk and are similarly deserving of a lower multiple valuation than in recent past. As such, he said, future per-share earnings upside from the company is likely to result from an expansion of gross margin rather than higher revenues.
"We believe that Apple will be bound by a trading range of $110-$140, vs. our previous comments of $120-$160," Bachman wrote. "With the constant flow of weak iPod and iPhone production estimates out of Taiwan over the past four weeks, we believe that a portion of negative news is in the stock, though not all [...]. Moreover, we believe that the appropriate multiple is more of debate than the unit forecast."
Whereas the analyst had previously valued Apple at 23-24 times fiscal 2009 per-share earnings plus cash, his adjusted estimates suggest the electronics maker is more fairly valued at just 20 times those earnings plus cash.
"We continue to believe that Apple [isn't] pricing its phones aggressively [enough], and needs to sign up more carriers, both of which we believe will serve as catalyst in [the second half of the year], with a July introduction of a 3G phone," he explained. "Hence, we think Apple may have more near-term downside before the stock can move higher at the end of the year."
To reflect his latest assumptions, Bachmean decreased his fiscal year 2008 iPod and iPhone unit sales forecasts from 54.6 million units to 51.1 million units, and from 9.3 million units to 7.7 million units, respectively. However, he increased his Mac estimates for the same time period to 9.4 million units from 9.1 million units.
For the March quarter, the analyst is forecasting 9.5 million iPods (down from 10.5
million) and iPhones of 1.4 million units (down from 2.1 million units). Over the next 45 days, he expects other analysts to instate similar cuts in their iPod and iPhone forecast, which he believes will continue to weigh on Apple shares.
"As importantly, we are now projecting 8.5 million units for [calendar year 2008], below Apple’s targeted unit sale of 10 million units," he added.
In his report, Bachmean argued that Apple should significantly lower the price of its iPhones given the belief that in addition to the $100 in profit from the sale of each unit, the company also generates an additional $200 from each customer over a 24-month period via revenue share agreements with wireless carriers like AT&T.
"More specifically, we believe that the 3G phone will help in that it will enable Apple to more effectively compete in Europe and Japan (new market), as long as Apple is price competitive," he wrote. "From our chart [above], we note that Apple is competitive when including rate plans but very expensive when focused on the initial cost of the handset."
The analyst reiterated HP as his top stock pick in the Enterprise Hardware and Imaging sector, yet maintained an Outperform rating on shares of Apple for the time being.
Given this notion, analyst Keith Bachman (formally of Banc of America) advised clients in a research note that Apple shares now carry a higher risk and are similarly deserving of a lower multiple valuation than in recent past. As such, he said, future per-share earnings upside from the company is likely to result from an expansion of gross margin rather than higher revenues.
"We believe that Apple will be bound by a trading range of $110-$140, vs. our previous comments of $120-$160," Bachman wrote. "With the constant flow of weak iPod and iPhone production estimates out of Taiwan over the past four weeks, we believe that a portion of negative news is in the stock, though not all [...]. Moreover, we believe that the appropriate multiple is more of debate than the unit forecast."
Whereas the analyst had previously valued Apple at 23-24 times fiscal 2009 per-share earnings plus cash, his adjusted estimates suggest the electronics maker is more fairly valued at just 20 times those earnings plus cash.
"We continue to believe that Apple [isn't] pricing its phones aggressively [enough], and needs to sign up more carriers, both of which we believe will serve as catalyst in [the second half of the year], with a July introduction of a 3G phone," he explained. "Hence, we think Apple may have more near-term downside before the stock can move higher at the end of the year."
To reflect his latest assumptions, Bachmean decreased his fiscal year 2008 iPod and iPhone unit sales forecasts from 54.6 million units to 51.1 million units, and from 9.3 million units to 7.7 million units, respectively. However, he increased his Mac estimates for the same time period to 9.4 million units from 9.1 million units.
For the March quarter, the analyst is forecasting 9.5 million iPods (down from 10.5
million) and iPhones of 1.4 million units (down from 2.1 million units). Over the next 45 days, he expects other analysts to instate similar cuts in their iPod and iPhone forecast, which he believes will continue to weigh on Apple shares.
"As importantly, we are now projecting 8.5 million units for [calendar year 2008], below Apple’s targeted unit sale of 10 million units," he added.
In his report, Bachmean argued that Apple should significantly lower the price of its iPhones given the belief that in addition to the $100 in profit from the sale of each unit, the company also generates an additional $200 from each customer over a 24-month period via revenue share agreements with wireless carriers like AT&T.
"More specifically, we believe that the 3G phone will help in that it will enable Apple to more effectively compete in Europe and Japan (new market), as long as Apple is price competitive," he wrote. "From our chart [above], we note that Apple is competitive when including rate plans but very expensive when focused on the initial cost of the handset."
The analyst reiterated HP as his top stock pick in the Enterprise Hardware and Imaging sector, yet maintained an Outperform rating on shares of Apple for the time being.
Comments
My non-techie wife is really enjoying video podcasts and my kid likes YouTube on the big screen. I also think that viewing photos on the big screen is stunning (I have a good 19" LCD monitor, but pictures on the 40" LCD TV are like seeing them all over again).
Are the analysts completely dismissive of this new aspect of Apple's business? My experience with the device has been terrific and all of the reviews targeted to consumers have been positive, although some videophiles have some tech quibbles that are really irrelevant to everyone else. The AppleTV could be a big hit, especially if Apple decides to promote it.
"From our chart [above], we note that Apple is competitive when including rate plans but very expensive when focused on the initial cost of the handset.
And the sky is blue?
What are these guys smoking?
Just who uses a phone without a wireless plan?
jeez.
And the sky is blue?
What are these guys smoking?
Just who uses a phone without a wireless plan?
jeez.
...and notice how they use the more expensive plan too...
I just got an AppleTV and since the Take 2 upgrade came out, I like it a lot. In two weeks, we've rented four movies and we are considering dropping Blockbuster Online (probably when the iTunes library gets big enough we'll pull the plug on BBO). The speed with which movies can get to you (ready to start in less than 30 seconds with a cable modem) is very impressive, as is the fact that "Michael Clayton" became available the very same day the DVD was released...
I couldn't agree more. I had the Apple TV before take two, and it was "fun" but take two is great! We've rented 6 movies in the last two weeks, and dropped NetFlix altogether. NetFlix was great until they started throttling back their "unlimited" service. The quality of the movies is excellent too - and as they start adding more movies the service will be virtually flawless.
From all the "analysis" I've read in the past year, I've really come to believe that these analysts just pull numbers out their ()()...
Interpretation: For the next few months their stock isn't expected to do much interesting, but the end of the year looks better. So if you're a short-term trader looking for quick money, shop elsewhere; if you're a long-term investor, the stock is at a nice price.
"the company's three growth drivers -- the Mac, iPod, and iPhone -- have been reduced to just one: the Mac."
Interpretation: We don't have any idea that Apple may enter new markets or come out with new products.
- Jasen.
I couldn't agree more. I had the Apple TV before take two, and it was "fun" but take two is great! We've rented 6 movies in the last two weeks, and dropped NetFlix altogether. NetFlix was great until they started throttling back their "unlimited" service. The quality of the movies is excellent too - and as they start adding more movies the service will be virtually flawless.
From all the "analysis" I've read in the past year, I've really come to believe that these analysts just pull numbers out their ()()...
All these guys can do is chase vendors and suppliers around on the telephone and try to get what is basically insider information.
Then they try to predict futures with a 10% view of the big picture, which, as Apple has shown time and time again, embarrasses them when they are proven wrong.
I have a friend who is a rather large gun dealer and he gets calls from these investment houses all the time looking for information from him about his order levels and such.
He tells them to piss off, and sometimes he feeds them bogus information. He hates when they try to manipulate the stocks and the markets, and really, that's all they're doing.
I see growth at AAPL in the coming 2 years from iPhone, Mac, and Apple TV. I don't know if oyu can call it growth, but i see tremendous profits coming out of iTunes, because every single person I know who has iTunes is renting movies with it now. Everybody, myself included. That is the word on the street, and I think its the most reliable word you can hear.
I couldn't agree more. I had the Apple TV before take two, and it was "fun" but take two is great! We've rented 6 movies in the last two weeks, and dropped NetFlix altogether. NetFlix was great until they started throttling back their "unlimited" service. The quality of the movies is excellent too - and as they start adding more movies the service will be virtually flawless.
From all the "analysis" I've read in the past year, I've really come to believe that these analysts just pull numbers out their ()()...
Even the throttled Netflix service should get you a lot more movies for the money than Apple.
They've been acting pretty arrogant lately and some humbling definitely would not hurt.
-Clive
Even the throttled Netflix service should get you a lot more movies for the money than Apple.
I agree, the only argument against netflix that I have encountered is actually being able to get lastest releases. It's almost impossible, especially in BluRay..
And the sky is blue?
What are these guys smoking?
Just who uses a phone without a wireless plan?
jeez.
Everyone uses a iPhone with a plan but Apple doesn't share revenue with every phone sold.
A significant number are sold and unlocked. Apple's only profit on these is the sale. IMO, this really limits Apple's ability to discount the iPhone much further. If they lower the price more it only makes it look more attractive to unlock.
One solution that minderbinder mentioned was to require activation with an Apple partner telco at the time of the sale. That might work.
The AppleTV could be a big hit, especially if Apple decides to promote it.
That's really the whole trick, isn't it? Apple is still sitting on the sidelines with AppleTV because Steve doesn't care about it.
What's going on in the boardroom, Apple?
Whether analysts actually know anything or not, I think bad news is what Apple needs right now.
They've been acting pretty arrogant lately and some humbling definitely would not hurt.
-Clive
Having your stock fall to almost 1/2 of it's recent high is enough to scare the flibbertigibbety out of anyone.
One solution that minderbinder mentioned was to require activation with an Apple partner telco at the time of the sale. That might work.
Interestingly, that's how it was done before Apple got into the business, and it's still generally done that way, but Apple had this not-invented-here attitude about that kind of arrangement. I think bucking that arrangement is also part of what confused people into thinking it's not a subsidized device.
From his own numbers, he wants Apple to cut $100 off so he can proclaim it the 'cheapest' overall product/service plan to own.
Guess what? It's right in there and it's product quality makes the rest of the competition look like dirt.
That's really the whole trick, isn't it? Apple is still sitting on the sidelines with AppleTV because Steve doesn't care about it.
What's going on in the boardroom, Apple?
I think it may be a catch-22. It's difficult to hype something that hasn't caught on big time, and it's hard to get there when your library consists of only a few thousand titles.