Apple Valuations: Still at Risk

Apple Inc. (AAPL) is expected to beat the Street when it reports fourth quarter results on Tuesday after market close, but the risk of an economic slowdown will likely take a bite out the company's earnings guidance, says RBC Dominion Securities analyst Mike Abramsky. 

He also warned clients that risk remains evident regarding Apple stock's current valuation.

"Despite valuation correcting to 19x [forward twelve month] P/E, and strong fundamentals (compelling products, iPhone upside, PC share gains), risks to valuation remain (margins and momentum) in the face of deteriorating macroeconomic conditions and weakening consumer demand," Mr. Abramsky said in a note to clients.

We see valuation rangebound and volatile, pending improved visibility to growth and margins, and look for more attractive entry points. 

Mr. Abramsky maintained his "sector perform" rating and $140 price target on Apple shares, based on a "bull case" valuation of 23x FTM P/E. His "bear case" valuation of $75 for the stock assumes a 16x FTM P/E.

As for tomorrow's earnings report, the analyst said he expects Q4 revenues and EPS to outpace consensus estimates on the strength of solid back-to-school momentum and promotions. He predicts revenues of $8.2-billion compared with the Street's $8.1-billion and EPS of $1.15, above consensus $1.11.

Mr. Abramsky added that Apple's revenue guidance for the first quarter in fiscal 2009 should be inline with consensus at $10.6 to 10.7-billion. EPS guidance will be soft, he said, hitting a range of $1.55 to $1.65, which is below the Street's $1.67 prediction.

"Apple's guidance may be more than typically conservative, given holiday consumer slowdown risks, along with margin impacts from product/pricing mix-shifts (US$999 Macbooks, refreshed aluminum Macbooks, revised Nanos)," he wrote.

Comments

[stocks:]

Good Predication on Apple

2008 Oct 20 02:52 PM

[top_tier:]

When are you analysts finally going to get it? That P/E for apple doesn't account for iPhone sales? They only book 1/8 the profits for any given quarter for iPhone sales. Geeesh get a clue

2008 Oct 20 03:06 PM

[awcabot:]

No original analysis, merely a rehashing of Mr. Abramsky's work.

Mr. Abramsky doesn't count in Apple's strong fundamentals it's $21B cash reserve, and no debt. He believes that the only challenges to Apple are declining gross margins and loss of momentum, when he ignores potential competitors (they are getting good), and trouble with content providers.

Mr. Abramsky doesn't know how to analyze, FP desk is merely copying his work without paying him a royalty fee, and SeekingAlpha keeps on disappointing.

2008 Oct 20 03:17 PM

[zoooomer:]

does anyone of these "experts" understand that ALL the market is based on what people "think" a stock is worth, not the charts and graphs and ratios and bs they dribble daily. people like apple, they buy apple stock, simple.

2008 Oct 20 03:46 PM

[aapladay:]

While it is true, how much of this is factored into the stock price already? The past few quarters have seen an upswing before earnings that beat the market. While AAPL had a few days it beat the market, it overall has been keepig pace. We may see a sell off tomorrow non the less, but this will be the bottom for AAPL if it see's it at all. It will all depend on current quarter earnings, which could be as high as 1.25 or higher, and next quarters estimates, which is really the BIG question mark.
Investors should also note that the iPhone a year from now will contribute much much more to earnings along with hopefully a "non recessionary" holiday season... and oh, at least Barron's thinks that this whole recession thing is way overblown.

2008 Oct 20 04:21 PM

[sgmsg:]

More a company make money more it's risky. Imagine Berkshire Hataway...

Buy Rimm : sales slowdown, less money, copy Apple, single product, not innovative anymore. This is a smart buy.

2008 Oct 20 05:46 PM

[Jared:]

It doesn't matter if AAPL sells off tomorrow or not. If Apple guides lower than street consensus, the stock is going to take another hit on Wednesday.

2008 Oct 20 05:46 PM

[Anonymous W...:]

Regardless, Apple will continue to grab a larger piece of the pie in whatever macroeconomic condition we are in. The losers will be the likes of RIMM and old stodgy players. Yes, AAPL could drop some more but is unwarranted and a buy opportunity. If you listened to Kramer and bought alot of RIMM, you now know what an idiot he is. He knows Nothing about Technology and flips on a dime.

2008 Oct 20 07:04 PM

[bobthenoob:]

"If you listened to Kramer and bought alot of RIMM, you now know what an idiot he is."

No, the real idiots are the ones listening to his advise to buy high and sell low. In the meantime Kramer gets paid by these pathetic sheeps.

2008 Oct 20 07:25 PM

[bobthenoob:]

Sorry, it's the bald headed Cramer, with a C not K.

2008 Oct 20 07:27 PM

[Kevin_S:]

Go short AAPL tomorrow to feel the heat! And good luck if there's a sell-off. Just don't let your home be forclosed. Apple will be $130 by Friday!

2008 Oct 20 07:28 PM

[Anonymous W...:]

Spelled with a C or K, it doesn't matter; We all know who he is and he's still a manipulating lunatic that only the inexperienced would listen to. RIMM is just another prime example of his failures. He continued to stick by RIMM and go against APPLE just to benefit himself and not admit he was wrong. His lack of technological awareness is pathetic. He is wrong, dead wrong most of the time. He's also a friend of that blowhard egomaniac Donald Trump.

2008 Oct 20 08:41 PM

[wallywonka:]

The Palasades Mall Apple Store in Nanuet, NY had over 125 customers in the store Saturday at about 5pm. One sales person told me that it had been like that all day! The store next door had 2 people in it. What recession? The mall parking lots are full of cars around here. There is a slow down, but it has not happened in every market. Even high end housing is still being built in the North east. So much for averages and typicals across the nation.

2008 Oct 20 09:15 PM

[Fremont Rea...:]

AAPL Vs. RIM vs. the wannabe's.

AAPL - every iPod user will eventually buy an iPhone. itune maintains the trade-up strategy, RIMM, has some technical lead in mail delivery, but over time, this can be emulated by the wannabes. Yes AAPL's UI can be imitated over time like windows did to MAC, but iTunes is proprietary. AAPL is safe over the long term for this.

2008 Oct 21 11:50 AM