Apple hit by another analyst call -- from Goldman
The investment bank has removed the tech giant from its Conviction Buy List on concerns over market share and new user growth.
By Chris Ciaccia
Just when you thought it was safe to go in the water with Apple (AAPL), Goldman Sachs says wait a minute.
The New York-based investment bank removed Apple from its Conviction Buy List although it kept its "buy" rating on the stock. Goldman cut its price target to $575 from $660, citing concerns of market share and new user growth. Goldman also lowered its earnings outlook for the calendar year to $44.64 per share, down from $47.29, as it believes Apple is likely to miss consensus estimates for both the March and June quarters.
Analyst Bill Shope lowered his sales estimates for the second quarter to $39.4 billion in from $42.69 billion, and his earnings estimates to $8.88 per share from $10.26 per share. He also cut iPhone and iPad estimates and now expects Apple to sell 30.9 million iPhones, down from 33.4 million, and 18.4 million iPads, down from 22.4 million in the June quarter.
Shope noted the iPhone 5 has been less successful than he previously estimated, generating less new users and less people upgrading to the new phone. He cut his estimates in the June quarter on a belief that customers will wait to refresh their phones ahead of the pending iPhone 5S, and Apple will also bring down channel inventory to reflect the upcoming product update.
"Despite our optimism on this front, we believe the stock's outperformance over the next 12 months will be more closely tied to whether or not the company's next product cycles can reinvigorate market share momentum and installed base growth," Shope wrote in his report. He is optimistic that new products, including a refreshed iPhone, iPad and perhaps other products will reinvigorate growth and the user base, but timing is uncertain now. "Until this uncertainty is resolved, the stock's upside potential should be more limited than we previously anticipated."
Shope noted that he expects Apple to introduce a low-cost iPhone around the third quarter of this calendar year. Recent rumors suggest that Apple will refresh the iPhone in this time frame (TheStreet), with the iPhone 5S coming, and perhaps a low-cost iPhone as well. Other Wall Street analysts have mentioned low-cost iPhones as being a likely product, so there appears to be some credence to this message (TheStreet). A low-cost iPhone could provide "substantial upside to our unit expectations in the back half of the year and into 2014," as Apple brings more customers into its ecosystem.
There have been concerns a low-cost iPhone would not be as good as the current one, but CEO Tim Cook said, "The only thing we'll never do is make a crappy product. We're going to make a great product. And so that's the only religion that we have is we must do something great, something bold, something ambitious."
Shope also believes that Apple "could reinvigorate its high-end momentum" with a larger iPhone. The iPhone 5 has a four-inch screen, while the recent Galaxy S4 from Samsung (SSNLF), which runs Google's (GOOG) Android operating system, has a larger screen. Cook has squashed the idea of a larger iPhone in the past, saying Apple has done extensive work and feels a four-inch screen is the right size.
In addition to a refreshed iPhone, Shope also expects Apple to update its iPad products in the second calendar quarter this year. "This will be a critical refresh as it will allow for channel fill in the June quarter and it has the potential to slow some of the cannibalization effects from the iPad mini," Shope said in the note. The tremendous success of the iPad mini has weighed on the larger iPad, which has hurt the company's gross margins, due to lower cost. The iPad mini starts at $329, while the 9.7-inch iPad with Retina Display starts at $499.
There has been much discussion about Apple's $137 billion in cash, with shareholders calling for a much larger return of cash. Activist investor David Einhorn called for Apple to issue preferred stock, called iPrefs to unlock the value of Apple's cash (TheStreet). Cook has stated in the past that Apple is in "very, very active" discussions on what to do with its billions.
If/when Apple does announce a new capital allocation plan, Shope believes this could provide "a healthy floor for the stock price." Should Apple use its international cash, Wall Street may be pleasantly surprised.
Concerns over innovation are nothing new with Apple and investor sentiment has continued to drift lower. There have been recent rumors that Apple could expand its product offerings, potentially moving into smart watches and television. Dubbed the iWatch and iTV, Shope believes that these new products could expand Apple's platform and continue to monetize its user base.
Recent reports have put the iWatch as being more than likely, with Bloomberg reporting the company has a team of 100 people working on the product.
Apple shares were higher in early market trading, up 1.9% to $436.83.
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