Analysts Weigh in on Apple Earnings; 10-15 Points More Downside?

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

- Piper Jaffray maintains their Outperform and $250 target 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%. The 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 $1,099) with the MacBook, or test the $1,799 price point with the MacBook Pro (currently $1,999). 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 revenues of $7.5B and 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, management 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 pullback 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 ASPs took another step lower). Macs 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 conference 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 points 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?

Comments

[Tom B]

The only analyst to listen to is Jaffrey. The rest are a bunch of nerds who MAY be able to crunch numbers, but have NO understanding of the businesses they are analying.

"I'm not buying AAPL here around $150. I continue to suspect the iPhone will be a fad"

That's just ludicrous.

[Murphy]

Tom B -

I pay more attention to Jaffrey, but you have to admit Munster has some pretty peculiar ideas about how to collect data. Still, he seems to get the big picture: Apple will be gaining Mac market share for years to come.

[macmatthews]

The iPhone has revolutionized the mobile phone business. Apple are years ahead of their competitors. Why do people need to see another revolutionary product in the near future? This is just childish and unrealistic. Even without any new products Apple should be over $200.

[macmatthews]

The iPhone has revolutionized the mobile phone business. Apple are years ahead of their competitors. Why do people need to see another revolutionary product in the near future? This is just childish and unrealistic. Even without any new products Apple should be over $200.

[davesmall]

just lowers my already low opinion of Wall Street analysts. If you can't get a job writing TV Ad copy for local automobile dealers, then give Wall Street Stock analysis a try.

[Uruz1]

Predicting chaotic systems is an exercise in futility. Stock analysts, by and large, are even less accurate than your local weatherman.

Do your own research and buy stocks that you expect to hold a long time. You'll seldom be sorry.

[JB Money]

iPhone is a Fad that every single phone manufacturer in the world is scrambling to copy and every carrier in the world is begging to get, publicly or privately. I am thinking the Automobile was also a Fad.

You have got to be either kidding or have your head buried so far in your hind quarters you cannot keep any brain cells functioning.

[JD1]

@davesmall
agreed. in fact, I think it's even harder to get a job writing that used car ad copy...and more challenging once you get it. analyst opinions are just that...opinions. and most of those rarely break from the typical herd mentality style of coverage, commenting on a stock ONLY when 2-3 others are doing the same. and then they just to provide the oh-so-useful "what he said" guidance/recommendatio... without any real research of his/her own.

that said, we DO need analysts to help us make informed market decisions. they just don't seem to be helping as of late, and haven't really in quite some time (including the boom times). I truly think we all might have better luck following a pin the tail on the donkey approach.

and finally, iPhone a fad?!? ridiculous. everyone is trying to imitate it, and doing a piss-poor job.

[Tom Jackson]

Given the significant clues at the conf call:
1. Something big on the horizon
2. Leveraging core competencies to keep others out (umbrella comment)
3. Emphasis on staying high value to consumer
4. The worldwide rollout is on track even with pipeline gaps
5. Keeping the focus on core competencies (software interface) and pushing it further. Consider this possibility:

A world class appropriately priced new line of computers that has the power to take on Dell and HP etc on price v perceived value world wide and integrate with everything else. Say cpus ranging from $599 to $999. Perhaps a global launch and impact high enough that SJ can move away from the day to day.

Tom

[peter02l]

"what are the chances we will see a repeat of iPod/Mac or even iPhone. Kinda slim, no?"

No.

[Neil Cohen]

many items can be copied but not duplicated. Apple sells more than a product - many have copied the ipod and none have dulicated. iPhone will enjoy continued success as it replaced the ipod. Global sales will be where we look for the future, first store in China finally now open.
This is no fad people - this is a superior product.
Buy 1/3 of a new position here.....if youre long i would wait as we all know how this stock can swing and look to add more around 140 on if we see a quick sell off.
Enjoy!

[Ice]

Yesterday I was in the ATT store on Park Ave. You can see there grown men in the 45-55 year range lining up to buy a 3g Iphone. All executive types, all haggling with sales guy to get on the list for when the Iphone become available again.
These are not a 20 year old in line for a Xbox or a PS/3. These were at least mid level exec from the surrounding banks.

Iphone is a hit also in the business environment. Just give AAPL some room to execute their plans. I am a strong holder in AAPL. Although I have some long term puts to cover the investment for disasters. But then that is my style of trading I hold nothing out right.

[Tom B]

"These are not a 20 year old in line for a Xbox or a PS/3. These were at least mid level exec from the surrounding banks."

At $200 for a "Touch", I expect 20 year olds (and younger) replacing their Game Boys. Game Boys have more games, but no accelerometer at this time, unless I am mistaken? Big potential market; their money is as "green" as the executives'!

[calculator]

Thank you 'Notable Calls':
"I'm not buying AAPL here around $150" - 150 in this time still risky.
my post 3 week ago about drop to $150:
seekingalpha.com/artic...
still thinking AAPL have enough surprises for investors.

[optionsgirl]

If you look at a one year chart, you will see the potential to gap down to the low to mid 140's. Still, I am long with some puts for protection.

[Fadboy]

Who is the author of this article??? I want to know who it is that said "I continue to suspect the iPhone will be a fad . . . ." I know only time will tell, but whoever the author is has likely blown all potential for credibility in understanding the concept of establishing platforms and markets. 25 million applications downloaded since its recent launch, and you think it is a fad!!???

[Mike farr]

More importantly, when a single phone with a miniscule marketshare has the vast majority of web accesses, you would have to conclude that the mobile web is a fad and that Nokia, Samsung, Motorola and Sony-Ericson have spent the majority of their R&D handset dollars (unsuccessfully) chasing that fad.

[Robcal1]

You obviously have a MAJOR bias towards the decline of this incredible company. Your points are without question, the most ridiculous I've read yet. And I've read a lot!!! You seriously ought to be 100% embarrassed and you should be reprimanded by your boss for writing such filth. You really need to write a retraction for sounding so incredibly retarded!!! No details need to be pointed out, you're well aware of what you did wrong.

[Brewer]

Food and water are also fads. Gasoline, etc... that too. Oh, and least I forget, you know what the biggest fad of the 90's was? Running windows.