Apple Cored Below $500 As Nomura Slams Margins
The defense of $500 was valiant, but as we expected, brief. And as of moment ago, Apple was finally trading well below the psychological barrier, or at $496 $495 $494: some $30 below Joe Terranova's "generational buy." The catalyst? Nothing unknown, but a big downgrade from Nomura which cut the Price Target from $660 to $530 did not help. What certainly did not help is that Nomura also sees $400 as a downside case, roughly in line with where Jeff Gundlach has said for many months is what his personal target on the faddy stock is. As for the record 230 uber-levered hedge funds who are still long the name: good luck with exiting in an orderly fashion.
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iPhone estimates cut, iPad raised
To reflect signs of weaker-than-expected iPhone 5 sales, we have cut unit estimates by 5% in FY13E and by 8% for FY14E. Our iPad unit estimates are raised by 12% and 13%, respectively, albeit entirely due to iPad mini sales, which rise to 70% of total iPad sales.
Estimates 7% and 13% below consensus for FY13E and FY14E
We now forecast EPS of $45 for FY13E and $50 for FY14E, respectively, 7% and 13% below consensus. We are more cautious than sell-side forecasts for revenue and gross margin, mostly driven by our expectation that iPhone gross margins and ASPs are unsustainably high.
Analysis shows EPS likely capping out at $45 - $51
Our scenario analysis shows that if iPhone gross margins fall from a recent high of 55% (estimated) to 45%, EPS for FY14E and FY15E will likely peak at $46 to $48, with $4-5 downside if margins fall to 40% – the historic peak for mobile phone vendors.
Valuing the stock at $400 to $660
Our blended average fair value based on falling iPhone gross margins comes to $495 – $579 (ex / with excess cash), with potential downside to $400 and upside to $660.
Near-term catalysts appear weak
Launch of iPhone 5S or iPad mini with Retina display could be positive but seems unlikely to materially boost demand. iOS7 launch may prove more critical (likely due in June), but recent management changes may limit extent of enhancements. China Mobile upside may take until 2014.
Target cut to $530 – Neutral retained
Downside risk is likely limited by low multiples, likely low buy-side estimates relative to sell-side consensus, and scope for dividend increase. Positive catalysts are likely more H2 weighted – e.g., high-end iPhone and 5S, iOS refresh – but impact of $300 iPhone could reinforce gross margin concerns.