Apple 2.0

Covering the business that Steve Jobs built

The 5 things that worry fund managers most about Apple

May 16, 2011: 11:22 AM ET

A window into the concerns of the institutions that control 71% of the company's shares

As you may have noticed, Apple's (AAPL) shares have gone nowhere this year -- and nowhere but down for the past week -- despite earnings the grew 92% year over year last quarter and show no signs of slowing this quarter.

Whatever is going on with the stock price probably has something to do with the fund managers who, as of Monday, controlled 71% of the outstanding shares. What are these guys thinking?

Well, as it happens, a team of Credit Suisse analysts led by Kulbinder Garcha spent part of the past 8 weeks meeting with 150 institutional investors to talk about Apple.

Apparently, they go an earful, which they summarized in a note to clients Monday as five "key recurring questions and concerns." We've listed them below the fold, along with Credit Suisse's responses:

  • Concern 1: Does the iPad have a demand issue? We don't think so. The company has highlighted that iPad has seen 'mother of all backlogs' and seems to be promising substantial volume growth near term (note we assume iPad volumes of 8mn in C2Q11). Longer term, we remain of the view that the tablet market will rise to 300mn units and Apple can retain 50% market share at least.
  • Concern 2: Are iPhone volumes reaching saturation? We demonstrate that even with the existing high-end focus, Apple can see smartphone volumes rise to 85mn/120mn in CY11/CY12 driven by i) smartphone segment growth of 52%/32% yoy, ii) additional carrier expansion in both North America and globally (CDMA carriers) and iii) share gains at existing customers (e.g. Telefonica).
  • Concern 3: Is Apple too big and aren't shares over-owned? Despite reaching 2.6% of S&P, we highlight this should not be a barrier for outperformance (the 5% level has been more of a ceiling). Compared with companies that have reached similar levels of the S&P, Apple's P/E is 50% lower. In addition, Apple's current strategy simultaneously addresses several areas of consumer spend (telecoms, PCs and CE), making its opportunity set unique and significant.
  • Concern 4: What about Steve Jobs' health? While this is a valid concern in the long term, We believe Apple's deep bench has shown robust execution and can continue to leverage the current business model/portfolio to add $10 of extra EPS per year longer term, through: i) launch of a low-end iPhone, ii) a greater push towards EM distribution and iii) a more concerted corporate push.
  • Concern 5: What about the cash pile? We don't believe that M&A or organic requirements are that sizeable versus the cash pile, hence we demonstrate that the company could institute a 5% yielding dividend and even in a conservative EPS scenario, could still have around $100bn in net cash five years from now.

According to Credit Suisse, the five concerns are "fading." Let's see if their reassurances make a difference in the stock price. We're not holding our breath.

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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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