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Apple Rallies Early as Bernstein Upgrades

by: Eric Savitz October 13, 2008 | about stocks: AAPL    

Eric Savitz

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Bernstein Research hardware analyst Toni Sacconaghi this morning upgraded his rating on Apple (AAPL) to Outperform from Market Perform, while cutting his price target on the shares to $135 from $175.

“We believe that the stock is overly discounted, that Apple’s short-term financial are likely to remain relatively healthy despite economic weakness and that the company’s longer-term growth story remains intact,” he wrote in a note this morning. “While short-term uncertainty persists, we believe that the stock’s overall risk-reward is compelling at current levels.”

Sacconaghi goes on to assert that Apple’s stock now appears “overly discounted.” He contends investors appear to be valuing the company on a P/E multiple, rather tan on cash flow, “which fundamentally undervalues the company given the huge deferred revenue growth associated with the iPhone.” He says the iPhone will add $2.25-$3.40 a share to cash flow above earnings in FY 2009, depending how many iPhones it sells. (He sees unit sales of 15-20 million for ‘09.) Excluding its $23 a share in cash, he writes, the stock trades at 9x forward fre cash flow, a multiple below the market and in line with IBM and Hewlett-Packard, “despite Apple’s superior long-term growth prospects.”

Or to look at it another way, Sacconaghi says the stock’s valuation at Friday’s close discounts an “overly bleak scenario” in which Mac units in FY ‘09 are flat with lower ASP, iPod revenues drop 22% and iPhone units are just 15 million at an ASP of $400, down from $500-plus in ‘08 - all with an operating margin down 360 basis points. But he thinks that is far gloomier than reality is likely to be.

Sacconaghi notes that Apple has about 1400 basis points of “relatively certain revenue growth next year from iPhone and music.” He expects Mac sales to remain healthy as the company gains share, with a move to lower price points “dramatically” expanding the addressable market. He sees Mac unit growth for ‘09 of at least 13%.

Sacconaghi says a notebook priced at $900 would expand the addressable market by nearly 50% in revenue terms - and 67% in terms of units. And $800 notebook, he figures, would increase the addressable revenue market by 69%.

For the long haul, he contends Apple’s secular growth story remains solid. In PCs, he sees the market unit growth at 9%-10% a year, with Apple a share gainer. In smartphones, he thinks Apple can convert most of the iPod installed base of 120 million to 130 million to iPhones, as consumer move to converged devices. And he also thinks AppleTV “is well positioned longer term to potentially act as the centerpiece of the digital home, and could ultimately morph into a capable set-top box replacement.”

He cautions, though that December quarter guidance is likely to be “significantly below current consensus,” which could pressure the stock. He cut his fiscal 2009 estimates to $38.2 billion in revenue and EPS of $5.60, below the consensus of $39.4 billion and $5.86. For the December quarter, his EPS estimate drops to $1.55 from $1.70. But he says that “buy-side expectations are considerably lower than consensus,” and that the overall risk-reward appears compelling.

In pre-market trading, Apple is up $5.35, or 5.5%, to $102.15.

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This article has 1 comment:

  •  
    Oct 13 07:30 PM
    "In smartphones, he thinks Apple can convert most of the iPod installed base of 120 million to 130 million to iPhones, as consumer move to converged devices."

    I don't think any serious shift like this will actually happen in the US until the iPhone is available on multiple networks. I understand there's an exclusivity contract, but it will hold AAPL back in terms of units sold no matter how much money AT&T gave them.

    I personally didn't like the customer service I got when I was with AT&T (they were Cingular at the time) and no matter how cool their phones are I won't go back to them. The iPhone is already compatible with T-Mobile's EDGE network, and an iPhone that would work on Verizon would be huge for their numbers. Verizon customers already like paying too much for their plans, what's another $35/month in iPhone data fees to them?

    I also take issue with the numbers this analyst uses. How many Shuffles and Nanos are included in that 120-130 million number? You're going to have a hard time convincing someone who just spent $69 on a shuffle to switch to a $199 phone that adds $30+ per month onto their phone bill.

    Regardless the selloff was extremely excessive all around (as evidenced by the turnaround today) and AAPL was one of the one's that would be least affected yet was punished the most.
    Reply
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