Apple 2.0

Covering the business that Steve Jobs built

Don't cry for Apple's share price

October 19, 2010: 7:05 AM ET

The market may not have liked what it heard on Monday's earnings call, but the analysts did

After Apple (AAPL) reported iPad sales and gross margin numbers that were lower than expected, the stock dropped nearly $20 in after-hours trading, dragging it below the $300-per-share line that was, for so many months, a psychological barrier.

It may not stay there long, if the analysts who began issuing post-earnings notes early Tuesday have anything to say about it.

Here's a sample. More as they come in.

Oppenheimer's Yair Reiner:

"Disappointment, thy name is expectation. Still, notwithstanding the vicissitudes of the short-term horse race, the disconnect between Apple's growth (~65% on top and bottom) and its valuation 13.5x is as wide and attractive as ever. This is a buying opportunity. We recommend you take it."

Morgan Stanley's Katy Huberty:

"We continue to believe AAPL is well positioned to capitalize on stronger than expected growth in mobile devices, improving penetration in the enterprise, and broadening distribution in China. While consensus gross margin is likely to be reset tomorrow, strong revenue trends largely offset the margin downside and we continue to expect upward EPS revisions in the near-term. We see the stock moving towards our new $375 (up from $346) base case target."

Societe General's Andy Perkins:

"The main surprises were the strength of iPhone unit sales, the slight weakness of iPad volumes and the lower-than-expected gross margin. We expect iPad sales to pick-up strongly next quarter (SGe 6m units), with the Q4 being adversely impacted by component shortages. However, the margin issue is possibly a longer term concern. Apple appeared keen to emphasise its first mover advantage in the tablet space. Various sources (e.g. iSuppli) have performed breakdown analysis that indicates that margins on the iPad are actually lower than those available on the iPhone. As such, a focus on extending its lead here could result in lower margins for the group overall."

Stifel Nicolaus' Doug Reid:

"After dismissing management's GM warning for several quarters, investors are likley to recalibrate assumptions sharply lower. Declining GM trends and cautious management outlook commentary both support our (until-now) out-of consensus call that Apple management is prepared to trade gross margin aggressively in exchange for market share in the smartphone and tablet markets. Both are areas where the ecosystem-centric competitive battleground is radically different from what Apple faced with media players and PCs."

Piper Jaffray's Gene Munster:

"While shares of Apple may pull back today (10/19), we would be buyers based on our belief that investors will gain optimism over the next three months that the growth story will continue. We are raising our FY11 revenue growth rate from 24% to 32% and our price target goes from $390 to $429."

Needham's Charlie Wolf:

"The one disappointment, if it can be called that, was iPad shipments. These came in at 4.2 million, up from 3.3 million in June. While the Street was expecting a higher number, it's instructive to note that iPad shipments have exceeded Mac shipments in just two quarters."

Susquehanna's Jeff Fidacaro:

"Revenue upside was driven by significantly better iPhone units, offsetting slightly lower than expected iPad sales (still up 28% Q/Q). We believe investors will be concerned with the lower than expected gross margin given the expected volume leverage. However, we are increasing our estimates substantially based on sales momentum into the December quarter with Apple revenue guidance, which is typically conservative, actually above Street consensus."

Deutsche Bank's Chris Whitmore:

"We believe Apple is aggressively pushing the price performance envelope (more value for the same price as prior gen product) and driving strong unit growth and supply constraints. We believe AAPL is on the right side of the price/performance elasticity equation and is extending its first mover advantage (iPhone and iPad). Looking forward, we expect GM to benefit from mix and scale benefits in iPhone and iPad."

RBC Capital's Mike Abramsky:

"Despite pending competition (particularly Android) we foresee sustained global share gains in 3 large, underpenetrated markets -- iPhone, iPad, Mac -- via sustained product leadership. Pending catalysts include: strong holiday sales, new products, healthy GMs. Apple should benefit from subsequent product generations and accessory cycles: 'Cascades of Cool'." [Raises price target to $365 from $350.]

Barclays' Ben Reitzes:

"While shares may react lower in the immediate- term to lower-than-expected gross margins, we believe Apple's F4Q report was very solid given the beat in Macs and iPhones, and a surprise appearance by a very confident Steve Jobs. We believe the above-consensus revenue guide was also positive, and that the EPS and gross margin outlook is quite conservative."

Kaufman Bros.' Shaw Wu:

"We and the Street clearly overestimated the initial adoption curve and ability of its branded U.S. channels to sell the iPad, not to mention depended too much on supply chain production capacity data. It reminds us of when consensus was overzealous in its assessment of initial iPhone demand with each version launch (2G, 3G, 3GS, and even the current 4). With additional U.S. distribution partners including Best Buy, Target, Walmart, AT&T, Verizon, and plenty of headroom for international expansion with only 26 countries (with many joining recently) compared to 85 for the iPhone 4, we believe there is great potential for future upside surprises."

Rodman & Renshaw's Ashok Kumar:

"Taking managements comments at face value, margins are expected to further decline to 36% on higher mix of iPad/iPod. We believe that margin pressures are likely to persist in light of long term trend of declining ASP and higher component costs... The stock is likely to consolidate near term until we have better visibility on steady state margins."

Southridge's Nehal Chokshi:

"Over the past three months we have gone from being very bullish from Sept 09 to Jun 10 (close to street high $347 price target in June 2010) to modestly positive (one of the lower price targets at $329) on AAPL shares. Our change in tone has been largely the result of takeaways from our proprietarysurvey work, which captured 2 of the 3 negative surprises associated with an other wise stellar earnings report from AAPL."

BMO's Keith Bachman:

"Impact: Negative – in the absence of high expectations, Apple's quarter would be viewed well. However, we believe investors will give an appropriate amount of focus on the relatively weak gross margins. By our math, iPhone gross margins are about 45% and iPad gross margins are about 30%. We have assumed only modest improvements in our model for gross margins going forward for both iPhones and iPads."

Bank of America's Scott Craig:

"Our thesis is unchanged – Apple remains a long-term share gainer with low penetration in large addressable markets, with margin expansion opportunities. Our Price Objective moves up to $415 from $400 and we reiterate our Buy rating."

JMP Securities' Alex Gauna:

"Apple now has 317 stores worldwide, 24 of which were opened during the quarter and 16 of which were opened in international markets. Of particular note was the opening of the Beijing and Shanghai stores that took place on the last day of the September quarter. Both Chinese locations recorded higher sales in the first day than any other store opening in company history."

Canaccord Genuity's Michael Walkley:

"We believe Apple's industry-leading software ecosystem (over 120M installed base of iOS device sales) and its leading hardware expertise will lead to a strong multi-year product cycle for its key products. In fact, based on Apple's strong results and solid sales guidance for its December quarter combined with our expectations of strong longer-term trends for iPhone and iPad sales, we anticipate strong earnings growth for Apple over the next two years versus our coverage universe. We reiterate our BUY rating and increase our 12- month price target to $421 from $366."

Citi's Richard Gardner:

"iPhone shipments exceeded even the most aggressive forecasts on the Street, driving $2B of upside to our revs estimate. While the 100bps miss on gross margin was clearly disappointing, the net impact to earnings was a $0.71 beat to our estimate of $3.93. While the shares could take a pause in the near term in light of the GM shortfall, we recommend that investors view any weakness as an enhanced buying opportunity given holiday seasonality and the impending Verizon launch. We increase our target price from $350 to $390."

Hudson Square's Daniel Ernst:

"Driven by a growing portfolio of well-designed, easy-to-use, media-centric devices/software, coupled with strong earnings growth and a cash-rich, debt-free balance sheet, we maintain our Buy rating on Apple, and the stock remains on the Hudson Square Conviction List."

Janney's William Fearnley:

"While the quarterly results for the iPad were lower than our estimates, our proprietary reseller surveys suggest the reseller channel is solidly behind the iPad line, and we expect the iPad to be a big hit for the Holidays. Apple reported their iPad Average Selling Price (ASP) in 4Q10 was $667 (including accessories) above our estimate $640."

J.P. Morgan's Mark Moskowitz:

"Shares of Overweight-rated Apple may come under near-term pressure, but it should be a phenomenon we expect to pass quickly. Gross margins of 36.9% were below Street consensus expectations of 38%. Meanwhile, iPad units came in below elevated investor expectations. Despite these bumps, Apple's meteoric revenue and profit growth and 14.1 million iPhone units should be enough for the bulls to keeping running."

See also:

[Follow Philip Elmer-DeWitt on Twitter @philiped]

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About This Author
Philip Elmer-Dewitt
Philip Elmer-DeWitt
Editor, Apple 2.0, Fortune

Philip Elmer-DeWitt has been following Apple since 1982, first for Time Magazine, and now on the Web for Fortune.com.

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