Market watchers reaffirm faith in Apple as new products shrink projected margins

Posted:
in AAPL Investors edited January 2014
Though Apple expects its margins to shrink in the holiday quarter as the company goes through an unprecedentedly large product transition, Wall Street watchers remain confident in recommending investors buy AAPL stock.

Apple reported its fourth quarter earnings on Thursday, revealing it sold 26.9 million iPhones, 14 million iPads and 4.9 million Macs in the September frame. Looking ahead to the December quarter, Apple executives noted that the company's recent product introductions have higher costs than their predecessors, which will drive down gross margins.

Following Apple's report, Wall Street analysts reacted positively, saying they expect Apple to have a blockbuster holiday quarter with h2 sales of the iPhone 5, iPad mini, new Macs and more. Below is a rundown of their takes:

Canaccord Genuity

As tracked by Philip Elmer-DeWitt of Apple 2.0, Michael Walkley was the most accurate analyst in predicting Apple's September quarter, with revenue and earnings per share estimates that were off by just 0.57 percent from the actual numbers. Professional analysts considerably outperformed independent market watchers, who proved too bullish.

iPhone 5


Walkley said that Apple's lower-than-expected margin guidance for the following quarter is disappointing, but it presents an opportunity for investors to buy in. He has reiterated his buy rating for AAPL stock with a price target of $800.

"Despite lower potential gross margin due to the record ramp of new products, we believe Apple's December quarter guidance could prove conservative given their strong product portfolio and our checks indicating very strong global demand," Walkley said.

Piper Jaffray

Gene Munster said Apple's September results demonstrated the strength of Apple's iPhone, as the handset exceeded market expectations of 25.3 million units.

For the December quarter, Apple's guidance is slightly better than the market expected, but projected earnings are worse. Munster noted that's a result of 80 percent of Apple's December product sales being upgraded in the past six weeks, marking the company's largest product transition quarter ever.

Munster expects that following the transition period, Apple's margins will rebound to their normal levels in the March quarter.

iPad mini

RBC Capital Markets

There was "nothing mini" about Apple's fourth quarter of fiscal 2012, said Amit Daryanani. He feels Apple's guidance for the December quarter "bakes in a healthy level of conservatism."

Like Munster, Daryanani sees Apple's margin-related issues as "transitory." He expects they will abate over the next one to two quarters.

For now, he recommends investors continue to accumulate shares of AAPL, focusing on the company's expected h2 holiday sales, ramping up of the iPhone 5 in China, long-term margin profile, and the potential for a full-fledged Apple television set.

Evercore Partners

Rob Cihra correctly projected Apple's iPhone sales for the September quarter. For the holiday period, he sees Apple selling 49 million iPhones, which would be 82 percent quarter over quarter growth, and a 32 percent increase from the same period last year.

Even with a blockbuster quarter and 49 million projected iPhone sales, Cihra believes Apple still won't be able to meet consumer demand for its latest handset.

"Apart from its $329 iPad mini, Apple has not really lowered the price of any new product," Cihra said, "so we don't see pressure from some new aggressive pricing strategy, rather believing (gross margins) should recover as yields ramp."

MacBook Pro

ISI Group

For Brian Marshall, the positives outweigh the negatives from Apple's September quarter. Specifically, he's bullish on iPhone sales and the potential of the iPad mini.

He believes the investment community is "wrapped around the axle" on what he called "tertiary details." He thinks investors should concentrate on the big picture, which is that demand for Apple products is currently greater than supply.

Morgan Stanley

Katy Huberty believes Apple "handed investors a perfect combination of a bullish demand view" along with an earnings per share reset that will set the company up to return to its "beat and raise" story.

She noted that Apple Chief Executive Tim Cook and Chief Financial Officer Peter Oppenheimer "sent a bullish message on demand" during their earnings conference call on Thursday.

As for the low margin guidance, Huberty sees a silver lining, as calendar year 2013 is shaping up as a margin expansion year, from 37 percent in the fourth quarter of calendar 2012 to a forecast of 41 percent in the first quarter of 2013.

iMac

J.P. Morgan

Mark Moskowitz also believes Apple has "beat and raise potential" in the cards for the first half of 2013. He believes that as the company scales its new products down the cost curve, its consolidated gross margin will move back to 40 percent or better following the December quarter.

He also believes Apple's December quarter outlook is a vintage conservative projection from the company. Apple has guided to revenue of $52 billion and earnings per share of $11.75, while Wall Street consensus is at $54.9 billion in revenue and $15.46 earnings per share.

"We believe the company is being conservative in its guidance, and we expect the gross margin to bottom in (the December quarter) as Apple ramps the new products across its product segments," he said. "We also note that the (December quarter) will have 13 weeks, versus 14 weeks in the year-ago quarter."

Needham Research

Apple's all-new product lineup unveiled in the past six weeks sets the stage for"a quarter unlike any in the past," Charlie Wolf said. He believes Apple's December quarter guidance is a reflection of the company's ability to supply products, not demand for them.

"We would not be surprised if Apple exits December with material backlogs in both iPhone 5 and iPad," he said.

Looking toward 2013, he assumes, like others, that Apple will progressively restore its gross margin from the anticipated lower margins in the December quarter.

JMP Research

Alex Gauna, known for being bearish on AAPL stock in stark contrast to his peers, has maintained his "market perform" rating. He said the positives of Apple's "resilient growth and profit generation in a tough macroeconomic environment" were "offset by further gross margin erosion as competition intensifies."

Gauna has reduced his fiscal year 2013 GAAP EPS estimate from $52.59 to $49.85, while average Wall Street expectations are at $53.30.
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Comments

  • Reply 1 of 36



    reaffirm



     


    Is this really necessary? Did we really not know this already?


     


    I can see this as something to be done if Apple's stock and earnings were as predictable as Indiana weather, but they're not. Apple's stock is basically the Sahara: "Will be hot. Continues to be hot. No rain… and hot."


     


    On that note, it was 80 here yesterday. It's 50 today, and in four more days we expect snow. 

  • Reply 2 of 36


    In January Apple will announce a $57 billion holiday quarter with margins almost a full percentage point above forecast and the stock price will just break through $800 in March.


     


    ... and analysts will say that was the last hurrah for Apple.

     

  • Reply 3 of 36
    Just so tired of all these anal.......ysts that look more like market spooks than trained objective stock analysts.

    If Apple does not sell something to every other living person on the planet, every quarter, they think Apple is DOOMED.

    Apple just had a 50 BILLION dollar quarter. And the anal......ysts are complaining cause it was not bigger....... In todays weak times, Apple sold over 50 BILLION dollars of stuff and its not even christmas yet. PLEASE people lets get a grip.

    Just a thought.
  • Reply 4 of 36
    nagrommenagromme Posts: 2,834member
    Wait... I’m confused. I thought with every passing moment Apple is ever greedier, INCREASING their margins :p
  • Reply 5 of 36
    Well, the analysts may be bearish, but the market sure isn't.
  • Reply 6 of 36


    I wish Wall Street applied the same rules to Apple as they do to Amazon.

  • Reply 7 of 36
    These analysts seem to really know what they are doing this time. In the past, I never paid much attention. But if they say to buy apple, I think that they are probably right.

    Way to go, guys!
  • Reply 8 of 36
    jeffdmjeffdm Posts: 12,946member
    eldernorm wrote: »
    Just so tired of all these anal.......ysts that look more like market spooks than trained objective stock analysts.

    Year ____ called and wanted their stale joke back.
  • Reply 9 of 36


    Originally Posted by JeffDM View Post

    Year ____ called and wanted their stale joke back.


     


    2009, maybe? I can't remember, either.

  • Reply 10 of 36
    jeffdmjeffdm Posts: 12,946member
    2009, maybe? I can't remember, either.

    I'll go with that.

    Never mind that ______ called and wanted their ______ back is, in itself, a stale joke too.
  • Reply 11 of 36


    Originally Posted by JeffDM View Post

    Never mind that ______ called and wanted their ______ back is, in itself, a stale joke too.


     


    So is calling that out. image


     


    The only "fresh" humor left? Calling Apple software "stale".


     


    Anyway, the takeaway from this is that produce is funny.

  • Reply 12 of 36
    newbeenewbee Posts: 2,055member

    Quote:

    Originally Posted by John Q. Public View Post



    Well, the analysts may be bearish, but the market sure isn't.


    We would do well to remember that the stock market is not rational, at the best of times. In any other occupation, if you make a prediction that does not come true, you were deemed to be wrong. In the stock market, however, the analysts were "right" and the company was "wrong" ..... go figure. The answer, of course, is that analysts can only improve their track record (and thus their fees) by shifting the blame onto "under performing companies" instead of where the blame really lies. Quite a racket they've got going, eh?

  • Reply 13 of 36
    gary54gary54 Posts: 169member


    Windows 8 is the biggest market opportunity they have had since Vista. Lots of people, including OEM manufacturers, are going to be looking at and for alternatives. They already are.


     


    Apple will come out a winner, Linux will come out a winner. The timing of these product launches is not a coincidence.

  • Reply 14 of 36
    adonissmuadonissmu Posts: 1,772member


    Apple didn't substantially beat Wall St's expectations. Now the market is punishing Apple for barely beating profit estimates. Eeek! I guess Apple's run is over. Now it's MSFT's turn to run up...

  • Reply 15 of 36
    jakebjakeb Posts: 557member


    Seriously, WTF is wrong with people. iPhone sales are up 58%. 58 freaking percent. And the stock just tanked to under $600. If I had any more free cash, I would back up the truck.

  • Reply 16 of 36
    jeffdmjeffdm Posts: 12,946member
    adonissmu wrote: »
    Apple didn't substantially beat Wall St's expectations. Now the market is punishing Apple for barely beating profit estimates. Eeek! I guess Apple's run is over. Now it's MSFT's turn to run up...

    Some people have explained it as profit taking. Buy on rumor, sell on news.

    If I didn't forget, if I owned their stock, I'd crunch the numbers to see if it's worth selling shares a couple days before earnings report and buying it back the day after at a lower price. I suppose that's similar to shorting stock.
  • Reply 17 of 36
    gatorguygatorguy Posts: 20,291member

    Quote:

    Originally Posted by TeeJay2012 View Post


    I wish Wall Street applied the same rules to Apple as they do to Amazon.



    Stock markets aren't showing much faith in any of the tech players, particularly those selling hardware, no matter if their profits are doubled YOY. 


     


     


    "Samsung Electronics Co. said July-September net profit nearly doubled to 6.56 trillion won ($5.97 billion) from 3.44 trillion won a year earlier. Revenue for the third quarter climbed 26 percent to 52.2 trillion won (around $47B).


    The company's shares fell 2 percent in Seoul after the earnings announcement. Analysts said investors are worried that the widespread adoption of smartphones in developed markets and heightened competition from rivals could squeeze profit from the lucrative smartphone business. Samsung and Apple Inc. together account for nearly half of global smartphone sales.


    The South Korean company, which raked in more than half of its profit and revenue from its mobile communications business, said its Galaxy S III and Galaxy Note II smartphones will help sustain its earnings momentum in the final quarter of the year.

  • Reply 18 of 36
    adonissmuadonissmu Posts: 1,772member

    Quote:

    Originally Posted by JeffDM View Post





    Some people have explained it as profit taking. Buy on rumor, sell on news.

    If I didn't forget, if I owned their stock, I'd crunch the numbers to see if it's worth selling shares a couple days before earnings report and buying it back the day after at a lower price. I suppose that's similar to shorting stock.


    Definitely know about the whole buy on the rumor and sell on the news. I didn't think this was the case...but it could be applied here I suppose. 

  • Reply 19 of 36
    gary54gary54 Posts: 169member

    Quote:

    Originally Posted by Gatorguy View Post


    Stock markets aren't showing much faith in any of the tech players, particularly those selling hardware, no matter if their profits are doubled YOY. 


     


     


    "Samsung Electronics Co. said July-September net profit nearly doubled to 6.56 trillion won ($5.97 billion) from 3.44 trillion won a year earlier. Revenue for the third quarter climbed 26 percent to 52.2 trillion won (around $47B).


    The company's shares fell 2 percent in Seoul after the earnings announcement. Analysts said investors are worried that the widespread adoption of smartphones in developed markets and heightened competition from rivals could squeeze profit from the lucrative smartphone business. Samsung and Apple Inc. together account for nearly half of global smartphone sales.


    The South Korean company, which raked in more than half of its profit and revenue from its mobile communications business, said its Galaxy S III and Galaxy Note II smartphones will help sustain its earnings momentum in the final quarter of the year.



     


    Exactly. F*ck Wall Street and its whacko reasoning. It's the coming year which will tell.

  • Reply 20 of 36
    adonissmuadonissmu Posts: 1,772member

    Quote:

    Originally Posted by Gatorguy View Post


    Stock markets aren't showing much faith in any of the tech players, particularly those selling hardware, no matter if their profits are doubled YOY. 


     


     


    "Samsung Electronics Co. said July-September net profit nearly doubled to 6.56 trillion won ($5.97 billion) from 3.44 trillion won a year earlier. Revenue for the third quarter climbed 26 percent to 52.2 trillion won (around $47B).


    The company's shares fell 2 percent in Seoul after the earnings announcement. Analysts said investors are worried that the widespread adoption of smartphones in developed markets and heightened competition from rivals could squeeze profit from the lucrative smartphone business. Samsung and Apple Inc. together account for nearly half of global smartphone sales.


    The South Korean company, which raked in more than half of its profit and revenue from its mobile communications business, said its Galaxy S III and Galaxy Note II smartphones will help sustain its earnings momentum in the final quarter of the year.



    They may believe the market is fully saturated at this point in time. 

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