Apple 2.0

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Apple's mixed first-quarter results: What analysts are saying

January 28, 2014: 10:53 AM ET

Disappointed with iPhone sales. Spooked by second-quarter guidance.

Screen Shot 2014-01-28 at 5.47.09 PMFORTUNE -- The Christmas quarter was a complicated one for Apple (AAPL), with record iPhone sales that disappointed, record iPad sales at lower average prices, and guidance that alerted investors that they can look forward next report to the company's first year-over-year revenue decline in 11 years.

Most analysts did their best to explain the nuances behind the numbers Apple released Monday night, but there were downgrades and lowered price targets up and down the Street, and the stock took a $41.61 (7.6%) hit Tuesday morning to open at $508.89.

Below: Excepts from the notes we've seen so far. New ones on top as they come in.

Colin Gillis, BCG: Haiku: The cracks are starting to show in the iPhone sales, as the market shifts. "With major carriers such as Verizon reporting that over 70% of customers have smartphones, the dynamic of the market is changing in our opinion. As the functionality gap narrows and the price gap widens between Apple and the competition, Apple may see continued pressure on unit sales. The company cited on the earnings call that it was negatively impacted by a major carrier that changed its upgrade policy. We see that resistance to Apple's premium pricing is likely to grow as the market becomes saturated."  Hold. $550.

Toni Sacconaghi, Bernstein Research: Big iPhone Miss Points to High-End Market Saturation. "Apple's iPhone unit shortfall was surprising because the company enjoyed several YoY tailwinds in the quarter: in fact, our analysis suggests that on comparable apples-to-apples basis, iPhones declined low single digits in the quarter (Exhibit 6) – a worrisome datapoint in a market where overall smartphone units have grown over ~35% for the previous 4 quarters (Exhibit 7). The sluggishness – coupled with weak unit volumes from Samsung – points to an increasingly saturated high end of the smartphone market." Outperform. Target lowered to $575 from $600.

Steven Milunovich, UBS: iPhone Worm in the Apple. "Apple argued that the March quarter top line will be better than it appears as it is negatively impacted by $2bn through four factors, including, (1) greater inventory build in last year's F2Q helping sell-in, (2) the weak yen, (3) iPod weakness, and (4) increased revenue deferral. The inventory build seems like a questionable excuse to us... We don't care that Apple is losing share as most growth occurs at low price points where Apple should not play, but the company still needs solid double-digit gains where demand is strongest." Buy. Target lowered to $625 from $650.

Mark Moskowitz, J.P. Morgan: Not Again: iPhone Stumbles into another New Year; We Maintain OW even as Air Pockets Persist. "We expect shares of Overweight-rated Apple to be under pressure in the near term. iPhone units were light, and the guidance for the Mar-Q implies continued softness, alongside higher OpEx. We think the iPhone air pockets reflect broader slowing in the smartphone market and company-specific factors. Apple is preparing for a few more quarters of turbulence in developed markets (North America) due to upgrade policy changes. Plus, Apple signaled the China Mobile roll-out will be limited by 4G-readiness. Our estimate revisions de-risk for these setbacks and higher OpEx, with a partial buffer in better-than-expected iPad trends." Overweight. Target lowered to $585 from $615.

Ittai Kidron, Oppenheimer: Cycle Exhausted; Downgrading to Perform. "Apple delivered a solid Dec. qtr., but provided guidance showing new products already in supply/ demand balance in most regions. We see Apple now entering a lull period (like the one seen in 1H-CY13) until its next new product cycle comes into view. Near-term expansion opportunities (current products) are mostly in emerging markets, but with competition tough (especially in China) and margins/ASPs at risk of moderation, we believe investors would be cautious. A larger screen iPhone and phablets are likely 2014 additions, but we see this as replacement focused with pressure mounting to deliver in a new product category where timing is uncertain. Overall, we see AAPL as range-bound through the summer." Downgraded rating to Perform from Outperform. Removed $560 price target.

Bill Shope, Goldman Sachs: Muted guidance a hefty setback, but opportunity persists. "The disappointing guidance is likely to pressure the stock in the near-term, but we are maintaining our Buy rating for the following reasons: (1) cash flow remains solid and leaves room for substantial increases in capital allocation in coming months; (2) the ramp of China Mobile is weighted toward the back half of the year, providing room for incremental iPhone growth; (3) Apple's enterprise momentum should accelerate in 2014; (4) platform enhancements, such as mobile payments, are increasingly likely in 2014; and (5) we believe Apple could be more open to competing more aggressively in the midrange smartphone market." Buy. $610.

Charlie Wolf, Needham: iPhone sales come up short. "Surprisingly, the issue was not international sales. Sales in Latin America were up 76%; in the EMEA region, up 65%; in Japan, up 40% and in China, up 20%. Rather, the shortfall stemmed from lower than expected sales in the U.S. Apple attributed part of the domestic shortfall to a change in carrier upgrade policies, which stretched the iPhone upgrade cycle among owners of the iPhone... The larger question is whether Apple can grow iPhone sales while positioning it as the aspirational brand in the market." Buy. $595. 

Gene Munster, Piper Jaffray: Underlying iPhone Growth Core Question, But 2014 Product Cycle Theme Intact. "We believe the miss on Dec-13 iPhone units and beat on iPhone ASP will also fuel debate around optimal pricing strategies for AAPL and the trade-off between unit and revenue growth vs margin. We believe AAPL has made its stance on the lower-end clear and expect the current focus on creating premium products at a premium price point to remain." Overweight. $640. 

Glen Yeung, Citi: iPhone disappoints again. "Stubborn bulls may point to in-line financials for F1Q14, but by Apple's own admission, these were helped by inventory build; F2Q14 guidance suffered as a result. Meanwhile, China Mobile is not contributing sufficiently to spur growth. And while Apple points to noticeable expansion beyond the first 16 cities in China, these first 16 account for ~33% of the country's urban population in the largest 340 cities, and likely more of CM's user base. When considering the relatively weak smartphone results from rival Samsung (although Samsung did gain share against Apple y/y), confidence in our Device Exhaustion theme is heightened, making it hard to get excited about smartphone-related stocks." Neutral. Target lowered to $560 from $580.

Kulbinder Garcha, Credit Suisse: Growth Challenges. "The results again demonstrated the challenges the company faces in growing profits for the business. Specifically, while Apple's advantage within the compute market remains, we believe the high end of the smartphone market is essentially ex- growth with Apple losing share in key markets. All this creates a barrier to a return to outsized EPS growth without the help of buybacks and/or new product categories." Neutral. Target lowered to $500 from $525. 

Brian White, Cantor Fitzgerald. Down but not out. "In our view, the high-end smartphone market hit a wall over the past year and Apple has struggled to grasp the scope of the situation... Our $777 price target is based on nearly 13x our CY:15 pro forma EPS estimate (adjusted for interest income/expense), plus Apple's net cash per share of $157.39." Buy. $777.

Scott Craig, Merrill Lynch: iPhone disappointment driving sentiment and valuation shift. "The high end smartphone market, where Apple only plays, continues to slow, and given F2Q14, Street expectations for 15mn+ iPhone units from China Mobile in 2014 (compared to our 7mn unit estimate – see report) looks unlikely. Better gross margin performance offsets, and we actually increase our EPS (Street likely to cut, in our view), but the revenue disappointment is driving downward sentiment and valuation. We see limited catalysts near term, other than share price/valuation and possible capital allocation." Neutral. $570. 

Amit Daryanani, RBC: Searching for Revenue Growth. "While Apple reported revenue and EPS modestly above expectations we note that investors are becoming concerned with regard to 1) iPhone unit growth and 2) lack of product innovation. While gross margins beat expectations and are expected to remain stable next quarter, revenue is expected to be flat on a y/y basis." Outperform. $590.

Andy Perkins, Societe Generale: Disappointing iPhone unit sales but some positives all the same. "While lower than expected handset sales and relatively poor guidance are concerns, we believe that there are a couple of positive points as well. The fact that gross margins improved slightly and that management suggests that this improvement will not be lost in Q2 FY14 are positives and point to good cost control. Additionally, the success of the new iPhone 5s (as opposed to weaker demand for the 5c model) means ASPs are likely to stay strong as well. Obviously press conjecture will be focused on new products from Apple to possibly boost returns including wearable tech, iTV and iWatch. However, as handset activities continue to grow as a share of Apple's turnover (now 56%), it may be that the only new product that really matters financially is the next iPhone, presumably released in September 2014. As we already forecast relatively weak handset sales in Q1, our forecasts are not materially impacted." Hold. $575.

William Power, Baird: Disappointing FQ1; New Products to the Rescue? "While acknowledging a disappointing quarter, our call has been based on an improved product cycle in 2014 vs. 2013, including new product categories, which we believe remains on track. Following recent seasonal patterns, the next couple of quarters are likely to be challenging, though we would use weakness to accumulate positions in front of iPhone 6 and new category rumors." Outperform. Target lowered to $600 from $620.

Stuart Jeffrey, Nomura: Weak Growth May Force Increase in Buybacks. "Apple's low single-digit growth makes it hard to justify any multiple expansion. Upside thus seems reliant in the near term on an accelerated share buyback program and on a reinvigorated iPhone launch late in the year. Both seem likely, but the latter may come with a risk of gross margin pressure, which a mid-range iPhone launch in 2015 may further exacerbate. Given the mix of positives and negatives, we retain our Neutral rating on the stock." Neutral. $545. 

Maynard Um, Wells Fargo: Bottom line. "Management's commentary that operators in the US changed upgrade policies to be stricter to the 24 month period reinforces our view that there are signs the balance of power may be starting to shift back to operators. While from a positive catalyst perspective we expect 2014 to be highlighted by new products (iPhone 6, iWatch, iBeacon) and an increase in dividends and share repurchases, we maintain our Market Perform rating on concerns that 1) GM will come under pressure later this year in the iPhone 6 cycle, 2) limited amount of incremental market cap opportunity in the existing product segments Apple plays in (including TV and watch opportunities), and 3) there are early industry signs of the balance of power shift back to wireless operators from handset vendors." Market perform. Valuation range lowered to $505-$575 from $536-$581.

Avi Silver, CLSA: Deja vu all over again. "Other than a proxy fight, we see few catalysts for Apple shares until May/June as new product component builds commence... Despite the near-term weakness, we still expect 1) continued iPhone ASP/margin stability, 2) share gains with iPhone 6, 3) a new product category later this year (wearable), and 4) potentially a larger buyback. With the stock trading at 8x unlevered free cash flow, we maintain our Outperform rating but lower our target from $613 to $580 on reduced estimates."  Outperform. Target lowered to $580 from $613.

Michael Walkley, Canaccord Genuity: Solid results with healthy margin gain, but softer iPhone sales impact guidance. "We believe Apple's soft Q2/F14 guidance is consistent with our expectations for a roughly 25% sequential decline in iPhone units post the Holiday season. We also note on a year-over-year basis, Apple's guidance does not include inventory builds for iPhones or iPads, includes greater revenue deferrals and unfavorable F/X to create tougher year-over-year comparisons for growth. We were impressed with stronger gross margin results and guidance than our estimates." Buy. Target lowered to $570 from $600.

Ben Reitzes, Barclays. Larger Screens & New Categories Needed to Revive Growth. "We believe that the iPhone unit momentum and guidance are negative surprises, but the cash flow and new product potential could be appreciated more over the long- term. We believe shares are likely to find support in the very low $500s at this point to factor in weak March and June quarters - with the potential to move higher later in the year if Apple could add to its pace of capital returns and as anticipation builds around new products in the fall. Hopefully Apple's plans include 2 new and larger iPhones, a new larger iPad, a new Apple TV, more solutions/partners for payments and a wearable device." Neutral. Target lowered to $570 from $585.

More as they come in.

See also:

Research: Marilyn Adamo and Marty Jones.

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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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