Analysts: Apple Should Stand Its Ground
Jan 25, 2013 5:00 AM PT
Apple's stock price got hammered Thursday following a financial report that spooked investors with dipping earnings.
Despite climbing revenue, the company reported a profit of just US$13.08 billion in the quarter ending Dec. 31. That compares to $13.06 billion during the same period a year ago. Earnings for the period dropped to $13.81 a share from $13.87.
The profit drop occurred even though revenue increased 17.7 percent, when compared with the same quarter a year ago. It soared to $54.5 billion from $46.3 billion, and Apple sold 20 percent more iPhones, iPads, Macs and iPods.
Nevertheless, by mid-day Thursday, Apple's stock price was hovering around $450 a share, down 11 percent for the day. A few short months ago in September 2012, the stock was selling at $700 a share.
"The sentiment in the market is completely against Apple right now," Rocco Pendola, director of social media for TheStreet.com, told MacNewsWorld. "The expectations are absolutely unrealistic."
Those expectations are contributing to a widening gap between Apple's fundamentals and its investors, according to Mark Moskowitz, an analyst with J.P. Morgan Securities.
"Investors are fearful that iPhone growth has peaked and consolidated gross margin is going to collapse," he wrote in a research note released Thursday.
Investors are wrong on both counts, Moskowitz argued, predicting that iPhone 5 sales will lead an acceleration of revenue growth -- though forecasted by Apple to be a paltry 7 percent for the March quarter -- particularly as more wireless networks start to support 4G LTE technology.
Supply chain constraints that hamstrung sales during the December quarter will be ironed out by the end of the March quarter, he maintained.
"In such a case," wrote Moskowitz, "we think that Apple can drive revenue growth reacceleration, and thereby start to beat consensus estimates again."
Margins should rebound in the March quarter as well, Moskowitz argued. For most companies, a margin of 38.6 percent would spark a celebration. No so with Apple.
However, margins will likely return to the 40 percent threshold investors are fond of by the end of the March quarter, Moskowitz forecasted.
In their rush to gut Apple's stock, investors are ignoring the long-term potential of the company, according to Chris Versace, editor of PowerTrend Profits.
"Apple is coming off of its largest product refresh in a number of years and, given the company's patent filings and stringing together its acquisition history, there is more to come as mobility and connectivity move beyond smartphones and tablets," he wrote in his investment newsletter Thursday.
A recent acquisition -- fingerprint authentication company AuthenTec -- can be a game changer for Apple, not only in the area of securing devices and mobile payments, but also in gaining acceptance of its products in corporations and government agencies, Versace noted.
The company is also looking into expanding its Siri technology into the automotive industry, he added.
Greatest Grid on the Planet
By developing hardware and software together over the years, Apple has created the "greatest digital grid on the planet," which has given it a long-term competitive advantage over all comers in the consumer electronics market, said Brian White, an analyst with Topeka Capital Markets, in a research note released Thursday.
"That said, we believe one missing piece to the puzzle is the TV market," he added, "but we expect news on this front over the next couple of years."
There are a number of measures Apple could implement to curry favor with investors -- such as accelerating stock buybacks, splitting the stock price, and raising dividends.
Dividends are a sore point with Trip Chowdhry, managing director for equity research at Global Equities Research, who believes Apple should scrap dividends entirely -- a move that would probably sink the company's stock price even further in the short term.
"When a tech company gives out dividends, that company usually underperforms the market," Chowdhry told MacNewsWorld.
"Investors are afraid Apple will become the next Microsoft or Cisco," he continued."When Microsoft and Cisco started giving out dividends, their stock started underperforming the market."
Adopting band-aid solutions to quell investor rumblings is a risky course, cautioned TheStreet.com's Pendola.
"If Apple has innovation coming and it's not just a refresh or cosmetic change to an existing product -- then Tim Cook should let the company speak for itself and ride through this period," he contended.
"That's what Apple has always done," said Pendola. "It shouldn't bow to Wall Street."