Apple 2.0

Covering the business that Steve Jobs built

What's eating Apple? The analysts weigh in

November 14, 2012: 7:08 AM ET

Since hitting $705 in September, Apple has dropped 24%. Will its shares ever bounce?

FORTUNE -- With Apple's (AAPL) share price off sharply from its September highs and seemingly stuck in the mid-$500 doldrums, sell-side analysts with considerably higher price targets (mean: $764) have been busy trying to calm their anxious clients. Excerpts from this week's notes:

RBC Capital's Amit Daryanani: Addressing Top Five Concerns. "In recent weeks we have discussed and heard myriad of issues that have lead to AAPL's under-performance (-23% since Sep-19 vs. S&P -6%). We believe there are five consistent concerns: 1) What's the next product launch, 2) Long-term gross-margin declines, 3) Supply-chain constraints, 4) 2013 Tax Increases and 5) Management Changes. We believe fundamentals at AAPL remain strong and the stock should outperform over the next 6-12 months driven by A) Strong Dec-qtr results given impressive product line-up for holidays, B) Gross-margins begin to improve in Dec-qtr and beyond, C) Potential ramp with China Mobile and iTV launch in 2013. Sticking with $750 price target. 

Barclays' Ben Reitzes: What's Ailing Apple? "We seem to be in the midst of one of the most controversial periods in Apple's stock in the last 10 years with what appears to be a sudden wave of pessimism overtaking the largest and most owned stock in the world. There is no shortage of publicity that since September 21st, shares of Apple have fallen over 20% vs. a drop in the NASDAQ of 9% over the same time frame. The first reason simply seems to be a loss of momentum with two sub-consensus EPS reports in a row – and then December quarter EPS guidance well below consensus. Technical levels and tax-selling seem to be playing roles as well. From a fundamental standpoint, we continue to view Apple as one of the clearest beneficiaries of the shift in computing toward mobile devices with the iPad and the iPhone. From a valuation standpoint, the company trades around 10x 2013 EPS (8x excluding cash), which puts it cheaper than the likes of IBM at around 11x. In this report, we attempt to identify the top fundamental concerns for Apple right now and evaluate their merits." Price target unchanged at $800.

CLSA's Avi Silver: Poised To Rebound. "We believe Apple's fundamentals are intact and supply chain checks are supportive of our F1Q 49m iPhone unit estimate (including 4/4S). Apple's poor stock performance of late raises several key questions which we address in this report. We believe the selloff creates a buying opportunity and maintain our estimates and $770 price target. [See Apple shares 'poised to rebound' for more detail.]

Baird's William Power: Sentiment Negative, but Fundamental Outlook Still Solid. "Based on recent investor meetings, there are a litany of Apple concerns, all of which we discuss in more detail in the research note.

Pace of innovation slowing. Perhaps, though multiple opportunities still ahead.
Recent software shortfalls. Yes, though Apple's software/hardware integration remains tops overall.
Samsung competition. Ditto the above answer.
Gross margins unsustainable. Long-term questions, though iPhone 4 could be a positive proxy for margin improvement in C2013.
Current supply shortages. Checks suggest improvement, though not perfect.
Product cycle visibility. iPad cycle change?
Replacement cycle challenges. Law of large numbers puts onus on market segmentation and new products/markets.
iPhone developing market strategy, or lack thereof. Huge opportunity, though don't expect near-term solution.
Identity crisis without Jobs. A well-known risk.
Macro impacts. Europe a concern, though U.S. and Asia demand look strong."

Maintaining $750 target price. 

Piper Jaffray's Gene Munster: Comfortable With FY13 Margin Assumptions. "The good news is this analysis suggests while margins will dip in December (in line with Street models) margins should return to historical levels inline with current Street estimates. The bad news is that it's unlikely we return to the reported 43.9% level in FY12 given the potential for a Samsung processor price increase, which would cause a 1-2 percentage point hit to margins." Reiterating $900 price target. 

Avondale Partners' John Bright: Innovation Without Jobs? "We expect AAPL's cash cows, the iPhone and iPad (~70% rev, ~75% op. income), will generate double digit earnings growth (~15-20% CAGR) over the next three years, driven by rapid growth in the smartphone/tablet markets and by modest market share gains. However, we expect decelerating earnings growth (~59% FY12, ~19% FY15) and increasing gross margin pressure (~44% FY12, ~40% FY15) driven by incremental market penetration and aggressive competition. Nevertheless, we acknowledge AAPL could reaccelerate earnings growth and build a competitive barrier through product innovation, for example with a TV product, or through increased stickiness of its existing products. Yet given AAPL's decelerating, albeit attractive, LT earnings growth, expected gross margin pressure, the speculative nature of any new product innovation, and to be seen stickiness of iCloud, we believe the probability of increased competition outweighs the probability of innovation without Jobs. Initiating coverage with $600 price target. 

More as they come in.

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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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