Hot Off The Wire – 09 September 2013

With potential growth plans in Asia Pacific and the announcement of a new series of iPhones and iPads this week, Apple Inc.’s (NASDAQ: AAPL) shares are creating a buzz again. Apple Inc. has scheduled back-to-back events this week. The first at the Apple headquarters in Cupertino, California where Apple is likely to announce its deal with NTT DoCoMO and the launch of a new series of iPhones/iPads; the other has been scheduled at Beijing, China where Apple is likely to announce new Apple strategy/products for China and a much discussed deal with the world’s largest mobile phone company, China Mobile Ltd.

Better than expected Q3’13 Result

Apple’s reported fiscal 3Q’13 EPS is $7.47, compared to 10.07 EPS last quarter. The recent quarter result shows its shrinking revenue in almost all product categories, excepting the iPhone and software services. Geographically, revenue in the US and Japan was surprising positive, while the Chinese revenue was disappointing. According to industry expectations, Apple expects revenue of about $34-$37 billion, gross margins between 36-37%, and operating expenses of $3.9-3.95 billion.

Source: Company website
Source: Company website
Source Company Data
Source Company Data

With its growth plans in Asia Pacific and the likely launch of a new series of iPhones and iPads this week, Apple is likely to be in the news in the days ahead. The future of Apple’s stock will depend upon the following:

Targeting Emerging Economies

According to IDC, Smartphone growth in emerging markets is projected to significantly outpace the developed countries and expand at a 21% CAGR from 2012 to 2017. The Asia Pacific region is expected to grow by 20% with estimations of 850+ million.

With the recent deal with Japan’s largest mobile carrier, NTT DoCoMo, and the possible deal with China Mobile Ltd,, Apple Inc. is likely to salvage its reducing market share in the Asia Pacific region and gain considerably from the projected growth in these emerging economies. NTT DoCoMo, Japan’s largest mobile carrier with an approximate 60 million customer base and about 45%of Japanese market share, is expected to start offering the Apple iPhone as early as the coming fall. China Mobile Ltd, the world’s largest mobile service provider with a more than 700 Million customer base, likely to be a significant strategic partnership too.

Source: Gartner
Source: Gartner
Source: Gartner
Source: Gartner

Margin Pressures from iPhone 5C, trade-in program, growth in Mid-range mobile market share will mitigate risk?

Apple’s supply chain efficiency and premium pricing helped it to earn a higher average margin on its Smartphones – considerably higher than any other competitor. The company enjoys a healthy margin of 36-37%, in comparison to its competitors, which have about a 20% margin. Apple may now face margin pressure if it introduces a lower priced iPhone. That this may likely be offset by risk, hinges on the cost of materials as well as the extent to which it cannibalizes premium iPhones. Apple can mitigate this risk by introducing a premium-priced large-screen iPhone that will compete more directly with Samsung’s Galaxy S series and other such high-end Smartphones. A trade-in program also could help offset margin pressures from iPhone 5C.

Conclusion

We expect Apple’s EPS to remain marginally higher at $7.87 rather than at its Q4’2013 guidance of $7.57. Apple has historically given conservative EPS targets and exceeded market expectations. Its EPS also depends on the timing of its launch and the shipment of the new iPhone 5S and 5C. Japan’s Nikkei has reported that Apple’s new 5S and mid-priced 5C iPhones will go on sale at SoftBank and KDDI on Sept. 20, following their Sept. 10 unveiling.

Given the fact that Apple’s margin pressure should be partially mitigated by the launch of a large screen/high-end iPhone and by an increased distribution in growing economies, we are expecting Apple to meet our EPS target of $7.87 for Q4’13 and $43.39 for 2014. Considering the long term growth potential of the industry, with a industry comparable P/E of 13, we are projecting a price target of $564 for the medium term and $624 for the long term.

The key risks to our price target could be a change in macroeconomic conditions, greater than expected contraction of the high-end smartphone market or a change in market perception (“wow” factor of Apple products) with the low-end iPhone.

TICKER NASDQ: AAPL
CURRENT PRICE: $ 498.22
PRICE TARGET $564
MARKET CAP: 452.6 MILLIONS
P/E RATIO: 12.34
52 WK HIGH-LOW: $385.10-$705.07
mini1APPLE INC. 6 MONTH PRICE VOLUME CHART
mini2

Source: IDC, Bloomberg Industries
Source: IDC, Bloomberg Industries

 

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