Apple Gets a Lift, But Analysts Show More Pessimism Than Optimism

Better-than-expected first quarter profits gave Apple Inc. (AAPL) shares a lift Thursday, but RBC Capital Markets analyst Mike Abramsky is not buying into the optimism.

"While outperforming guidance as usual, cracks appear in Apple's resiliency," he said in a note to clients.

In particular, he noted that Apple shipped 3% fewer Macbooks in Q1 compared to the previous quarter, and suffered a 22% quarter-over-quarter decline in desktop shipments. iPhone shipments were also down from the previous quarter, falling 37%.

Worse still, the analyst said, was Apple's guidance that suggests growth will continue to decline this year.

He wrote:

Headline Q1 results were less worse than investors feared, however with F09 Macs growth at estimated 4% vs 38% F08, iPhones slowing, iPods saturated, we see a growth 'downshift' for Apple, positioned as premium-priced amidst a worsening global recession - with further demand declines expected ahead.

Mr. Abramsky maintained his "underperform" stock rating and $70 price target, and continues to see

revaluation of Apple's valuation multiple (17x vs. Nasdaq at 14x, PC/wireless peers at 11-13x) on reduced growth expectations, visibility amidst deteriorating consumer spending, and near-term uncertainty re leadership.

Canaccord Adams analyst Peter Misek also expressed concerns about Apple's near term success and maintained his "hold" rating and $90 price target.

He told clients in a note:

We remain very cautious on the broader consumer spending category, particularly for high-end segments such as Apple’s. While it appears that Europe and Asia were able to offset some of the weakness in the US, we have reservations that this trend will persist.

Others on the Street were less pessimistic about Apple's prospects going forward, including Richard Gardner at Citigroup Global Markets. He reiterated his "buy" rating and increased his price target from C$132 to C$147, based on expectations that Apple will materially exceed its FY09 gross margin guidance of 30-31%.

Comments

[Zoltan L. K...:]

Why are these guys looking at numbers like shipments in a contracting market and why do they forget to look at value growth. Sales look very good and Apple is making approximately over a billion cash per month. Add the expected value of this to the already accumulated 28-29 billion and then look at current marketr value.

Jan 23 04:11 AM

[awcabot:]

Biased article.

Abramsky is the only analyst to have a negative outlook on Apple and he failed quite spectacularly on his EPS estimates for this quarter, in spite of being quite close to actual units shipped. This shows that he can not do analysis even if he has good data to start with and I am disappointed in FP Trading Desk selecting his analysis over the others.

Jan 23 06:40 AM

[Roger Knights:]

Have the pessimistic analysts factored in the built-in deferred revenue that will be distributed to the bottom line from iPhone sales every quarter? I doubt it, since it was this factor (overlooked in this quarter despite Andy Zaky's hectoring) that was most responsible for the upside surprise Wednesday. Next quarter the amount rolled forward from the previous eight quarters will be even larger.

As for the decline in Mac desktop shipments, that's because the line hasn't been refreshed. It's logical to expect that to occur within the next two or three months, and thus for shipments to perk up in the same way that laptop shipments did. I suspect these upgrades will be technically attractive, not just cosmetic. If Apple had wanted to merely tart up their desktops in time for the holidays, it could easily have done so. This willingness to do the right thing indicates a focus on quality over quantity that will pay off down the road.

The decline in iPhone sales is partly due to Apple's drawing down its inventory by 250,000 units this quarter. Further, it was only to be expected that there would be a diminution of sales after the satisfaction of pent-up demand for the new version in the prior quarter. Finally, it's likely that there will be a new version of the iPhone in the 3Q, which will lead to a new round of acquisitions and a new spike in sales.

As for the iPod market being saturated: that makes sense, and yet analysts have been saying that for quite a while, and sales haven't fallen off to the degree they've expected. So negativists may be missing something. Some iPod owners want to upgrade to a Touch model, which has a higher amount of profit. So revenues won't fall off a cliff. (iPod sales are only 16% or so of Apple's revenue at this point anyway--or that is the figure I recall reading a day or two ago.)

Jan 23 07:32 AM

[KenC:]

Of course, Abramsky hasn't figured in deferred revenues. If he had, he would make an adjustment to the p/e ratio he applies to Apple relative to the NASDAQ. I mean, you can't compare Apple's earnings to the NASDAQ, when Apple has so much of its earnings deferred. If all the other NASDAQ companies were like that, then fine, but they aren't, so he can't.

Jan 23 02:53 PM

[Oh Blah Dee...:]

RE: "... iPhone shipments were also down from the previous quarter, falling 37%...."

Approximately 2 millions iPhones shipped in the previous quarter were "channel fill," meaning that they became inventory/stock in the sales channel and were not sold to end users.

Jan 23 05:02 PM

[Ted Cranmor...:]

All Apple investors should soberly consider Abramsky's points - are they valid in any sense? I would say they are mostly quite valid, but also all easily refuted and when compared to the rest of the market, his $70 target actually appears ridiculous.

No article are Apple valuation can be seriously considered with noting the growing mountain of deferred revenue building up from iPhone sales due to the subscription accounting model. It's guaranteeing a rosy future while at the same time seriously muting earnings for the present. If this isn't seriously discussed, any opinion can be immediately discounted as 'very light' and not worthy of serious merit

On the numbers, I'd give Mike his points if we were in a regular economic cycle or if other companies were doing significantly better. It's here you realize that apple's numbers are being affected by a consumer that isn't spending, but actually apple is fairing far better than it's brethren.

In this terrible economy, who would not put their money on a company with 28 billion in cash and one that is able to maintain margins and still outsell the competition? The only other companies selling anything are cutting margins significantly. Not only are these companies making almost nothing now, their pricing structures are ruined. Oh my god, Apple is seriously undervalued in these conditions. When things pick up (which I don't think will be anytime soon), this company will be a great indicator and will light all the dry powder that is waiting to re-enter the game.

Jan 24 11:35 PM