$AAPL Drops 12%, Analysts Jockey for Position

| Analysis

Apple's earning report didn't please regular session investors any more than it did Wednesday's after-hours traders, as they sent the stock plummeting 12.35 percent to US$450.50, a drop of $63.505 per share. Analysts spent the day digesting Apple's earning report and jockeying for position in amidst all the bearish sentiment.

$AAPL Chart for January 24th, 2013

$AAPL Chart for January 24th, 2013
Source: Yahoo! Finance

On Wednesday, Apple reported record revenue and earnings, met or almost met estimates on revenue (depending on who you ask), beat earnings estimates, and offered guidance below analyst expectations. In addition, Apple CFO Peter Oppenheimer announced that from now on Apple would offer guidance that was not artificially conservative and would include a realistic range of what the company will actually do.

While the earnings beat was solid, Wall Street focused on the guidance miss. More specifically, the guidance miss reinforced the meme of the last few weeks that Apple's growth is slowing, and that demand for iPhone is in some way waning.

Thursday's Wall Street story spanned the gamut from analysts like Peter Misek of Jeffries & Co. who cut their price target, their rating, and their estimates for $AAPL to Ben Reitzes of Barclays who cut his price target but maintained a "Buy," to Shaw Wu of Sterne Agee who was more upbeat, but also maintained his "Buy" and cut his price target.

Misek

Peter Misek of Jeffries & Co. took a very bearish view of Apple's earnings report. He told clients that Apple's iPhone is slowing down, that margins will continue to fall, and that Apple's new guidance method means there will be less upside.

This last bullet point is particularly interesting since Apple's guidance has long been understood to be an exercise in sandbagging. Much of $AAPL's value has been determined by analyst estimates that were themselves a game to figure out how much Apple would beat its own sandbagged guidance.

In other words, Apple beating its own guidance long ago ceased to be an upside surprise as the focus shifted to whether Apple would instead beat analyst estimates. Mr. Misek appears to be telling his clients that this game will become less of a game and that this will make the stock less valuable.

Feel free to make of that what you will.

Mr. Misek cut his price target from $800 to $500 and his rating from a "Buy" to a "Hold."

Reitzes

Ben Reitzes of Barclays took a much more pragmatic look at Apple's earnings report. In a note to clients obtained by The Mac Observer, Mr. Reitzes wrote, "We believe a capitulation process is underway – and while painful – it is healthy since the loftiest expectations should be reined in quite a bit."

He wrote, "We believe that investors were very disappointed to hear that Apple is happy with its screen size for the iPhone 5, which seemed to reject the larger-screened iPhone idea. However, the answer Tim Cook gave, in our opinion, was a typical Apple answer, and we do believe that a larger screened iPhone is in development – but may not make it into the line-up this year."

Note his comment about investors wanting Apple to play follow the leader with a larger iPhone. This has definitely been a part of the shift in investor (and pundit) sentiment regarding Apple, and it absolutely played a role in Thursday's $AAPL sell-off.

Mr. Reitzes said that new product launches this Spring could change investor sentiment on Apple, but until and if, it was difficult to see that sentiment improving.

"The iPhone 5S could have very interesting services attached to it that create some excitement," he wrote. "The new services in iOS 7, married to the 5S are in fact the real hope that Apple has in regaining some excitement in the story this year."

The analyst lowered his EPS estimates for the March quarter to $10.01, down from $12.00, and his fiscal 2013 ES estimates down to $44.56, down from $49. He cut his price target to $575, a 22 percent decline from his previous price target of $740.

Wu

Shaw Wu had one of the most upbeat reactions to Apple's earnings report. He noted that Apple beat consensus earning, calling it a "sizable EPS beat on slightly light revenue." He also noted that Apple beat consensus gross margin estimates. He called iPhone shipments a beat, iPad shipments a slight miss, and wrote that Apple's Mac sales were "much lower than consensus."

In a research note obtained by TMO, Mr. Wu told his clients that Apple, "reported the strongest quarter in its 36-yr history adding $16 billion in cash but below expectations of a bigger beat that investors have grown accustomed to. Its outlook was vintage conservative but warned may be more realistic than [it has] historically been."

He added, "This is bitter medicine but we see as the right move in resetting consensus. We don't think the AAPL growth story is over but shares will likely languish until confidence is restored."

He lowered his fiscal 2013 estimates to $187.4 billion, down from $192.6 billion, and his EPS estimates to $47.05, down from $49.50. Consensus estimates are still fluctuating as analysts jockey for position in the wake of Apple's earnings report, but currently sit at $189.7 billion in revenue and $48.03 in earnings.

He cut his price target to $715, down from $840, and maintained a "Buy." His price target is based on a 10X multiplier of fiscal EPS estimates of $57.17, plus the $145 per share in cash that Apple holds.

*In the interest of full disclosure, the author holds a tiny, almost insignificant share in AAPL stock that was not an influence in the creation of this article.

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Comments

geoduck

Just a thought,
Is it possible that AAPL was overvalued at ~$700? I mean this feels like the drop after any number of bubbles that the head of the FED once said were due to “irrational exuberance”. How likely is it that AAPL fundamentals make more sense in the $50-$550 range and the peak was due to people buying AAPL thinking it would go up forever. (I seem to remember someone predicting >$1000/share at one point last fall).

geoduck

That should read: make more sense in the $450-$550 range.

Hagen

Brian White of Topeka Capital still has a price target of $1,111 on AAPL. Most other analysts are now placing the target roughly around the $600-650 range.

At today’s close of $450, AAPL’s P/E ratio is 10.15. In comparison, Samsung is 10.50, MSFT is 14.62, HPQ is 9.44, DELL is 8.87, and RIMM is 6.35. Oh, and AMZN (barring their current quarter) has been holding a P/E of 50 to 100. So the market seems to think that Apple is closer to the beleaguered and failing tech companies than the successful ones.

ibuck

Hopefully, this drop in price will deter the overexuberant, irrational “investors” from buying AAPL.

Lancashire-Witch

Several times Tim Cook highlighted supply constraints. Analysts seem to be assuming that such constraints will remain or even get worse.  If the current range of products have problems in manufacture then that’s an Sir Jon problem. There’s not much point having a 27 inch computer that looks like a sheet of glass if you can’t make enough of them at the right time.

John Martellaro

Many want to force Apple to do something that looks fashionable, but is arm chair, superficial reasoning.
1. Compete for market share with iDevices.
2. Make a cheaper iPhone.
3. Make an iPhone with a larger display.
4. Quickly introduce a new, killer product.
5. Maintain a huge growth rate.

Apple is going its own way, selling every item in the product line as fast as it can make it. So the company is being punished for not behaving.

IMO.

Bosco (Brad Hutchings)

John, the company is actually being punished for sitting on a whole bunch of capital and having no idea what to do with it. Secondarily, they’re being punished for cutting off their face to spite their nose with removing Samsung from the supply chain. Not so much for the decision itself but for the repercussions.

Lee Dronick

See today’s Joy of Tech comic http://www.geekculture.com/joyoftech/joyarchives/1796.html

“actually being punished for sitting on a whole bunch of capital and having no idea what to do with it.”

I am sure they know what to do with it and have plans for it.

“they’re being punished for cutting off their face to spite their nose with removing Samsung from the supply chain”

God Bosco, you are an eye roll.

Lee Dronick

I can’t believe that I am agreeing, for the most part, with Farhad Manjoo

http://www.slate.com/articles/technology/technology/2013/01/apple_earnings_report_don_t_let_its_stock_slump_fool_you_the_company_is.html

Paul Goodwin

Yes, Apple stock went up way too much on “irrational exuberance”. If you look at their stock prices during a more rational period, 2009-2011, it trendlines to a little over $500 today. There is nothing going on with Apple’s financials to lead me to believe that the trendline can’t continue. The only reason it wouldn’t is the irrational selling by owners listening to bogus predictions by pundits who virtually never get their predictions right.

Mr Wu has historically been at the top of the list of accuracy in predicting.

I believe my paltry 17 shares of stock are well below the rational and non-exuberant value by maybe 10-15%.

skipaq

You are spot on, John. I have followed AAPL for nearly 20 years and have invested in it for about 15 years. In that time I have been fortunate to take advantage of these big price swings 3 or 4 times. Not to mention splits back in time. Nothing comes within a mile of the returns from this stock. I did make a few thousand by buying Bank of America when it bottomed out around $1.60; then selling it just before it hit $10. But that and a few others pale compared to Apple. I personally love the way this stock swings. These analysts surely are doing even better.

Paul Goodwin

Unfortunately, record sales and profits don’t make stock prices go up. GE has demonstrated stock price stagnation for 10 years, and through most of that period, they were breaking records for earnings and profit. The current GE CEO has never been able to solve the stock price problem. The question now, is whether Tim Cook can solve a similar riddle.

One thing is for sure, there are far more inaccurate predictors than accurate ones. And those pundits pray on share owners’ sentiment. This year it’s the negative sentiment that’s getting them readers. Last year it was the positive sentiment. I just read one prediction from mid last year predicting a $2000 ceiling. And I just read a new prediction of $270 this year. Go with Mr Wu. He seems to be consistently better at it. I think the stock will get to that number in about two years, but that’s with an assumption that things get more normal,  the negativity gets tiresome, and people begin to see that AAPL is still a great investment. I bought the bulk of my little 17 shares at about $250 in mid 2010. Not many places you get a yield like that.

Bosco (Brad Hutchings)

I am sure they know what to do with it and have plans for it.

Considering most of it is basically sitting on a boat, no they don’t. Ideally, they would have been building their own off-shore manufacturing as a hedge against Samsung. Instead, the quit Samsung and can’t find other partners up to the task. Then Ive gets conveniently blamed for having designs that are too difficult to make. BTW, that’s your big sign that Cookie knows he is toast.

But back to your point, when even the favorable analysts are saying that Apple could buy back shares (with money it would have to pay the hefty corporate tax on when it repatriates), you know the company is just plain out of ideas.

Lee Dronick

“Considering most of it is basically sitting on a boat”

That is a plan son, a plan for the time being, and they are building things. However, neither you, I, or anyone else outside of an inner circle at Apple knows what is in works for that wad of cash. Oh, and Apple dumping Samsung was a very smart thing to do, you business to partners not competitors.

A rare day. Rain here in San Diego, I agree Farhad Manjoo, and I am engaging in conversation with Bosco. Gotta run those cows won’t milk themselves.

Paul Goodwin

” can’t find other partners up to the task.” ? Bosco, they just built and sold a record number of iPhones and iPads.

And stock buybacks are used by every corporation to help manage earnings per share, whether they are out of ideas or not.

Apple’s R&D budget for fiscal 2012 was up 40% over 2011. But R&D $ spent doesn’t always result in great products. I’m banking that Apple’s increase will in late 2013 and early 2014. Their major impact product release schedule of the past has been to put out something outstanding about every 3-5 years. It’s been about 3 years since the iPad was released.

Paul Goodwin

It totally amazes me that the “news” now calls Apple’s financial report as disappointing. Yesterday it was “mixed”. The deathnell will be out on Monday-or later tonight. Unless it’s already out. I haven’t looked.

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