Apple on rebound as key Q3 looms
Apple Inc. chief executive Tim Cook has solidified his strategy and regained stakeholders’ confidence if share price is any indication.
The stock has risen 30% to about US$97 over the past three months as investors eagerly await more information about the next iPhone refresh cycle and various other products and services Apple may launch this year.
Slower-than-expected earnings by smartphone and tablet rival Samsung Electronics Co. Ltd. may also open a window as Apple gets set to report third-quarter results July 22.
“Looking short term, our checks point to earnings and revenues ahead of consensus; troubles at Samsung are opening up an opportunity for Apple to regain share, not only near term but possibly long term,” Barclays PLC analyst Ben Reitzes told clients.
He upgraded the stock to overweight from equal weight and raised his price target to US$110 from US$95, noting Apple’s management has reversed many of the warning signs evident earlier in 2014.
Mr. Reitzes also raised his estimates for the June quarter as a result of improving metrics for the iPhone and Apple’s desire to protect margins.
He now forecasts revenue to come in at US$38.3-billion and earnings per share of US$1.24, above average analyst expectations.
“Our checks around new products into 2015 are so strong, we are compelled to get on board even if it’s midway through the rebound trade,” the analyst said.
RBC Capital Markets analysts Amit Daryanani and Mark Sue believe investors will focus mainly on data points of new product launches such as the iPhone 6, new product categories like the iWatch, and the iPad refresh, as well as their timing given that Q3 historically represents the toughest quarter for Apple.
They also expect investors will be interested in the gross-margin outlook through the upcoming product ramp.
“In our view, Apple could see product momentum return in the second half of 2014 and beyond if new product lines (iWatch) coupled with the refresh of iPhone 6 (potentially two larger form factor phones) see material end-market sales,” they said in a research note, in which they continue to rate Apple at outperform with a US$100 price target.
Barclays’ Mr. Reitzes said he sees similarities between Apple today and Google Inc. a few years ago.
Google struggled in the first half of 2012 on concerns about the shift toward mobile advertising and the resulting negative impact on pricing. The stock fell roughly 15% between January and June of that year, and its forward P/E multiple dipped to about 12x.
“Then, everything changed,” the analyst said, noting that Google reported better-than-expected Q2 earnings and revenue proved to have bottomed out in Q1. “It was evident that Google was underowned in hindsight and sentiment was overly negative — as execution on its mobile strategy improved and pricing started to stabilize over the subsequent quarters.”
Google’s share price subsequently doubled and its P/E expanded to approximately 16x by the end of 2012 and more than 20x by the fall of 2013. Apple is quickly approaching its split-adjusted record high of US$100.30 in September 2012, up more than 70% since its most recent low in April 2013.
“It is now clear to us that Apple may be merely in the middle of its ‘Google-like’ re-rating since our new estimates have a similar year-over-year revenue acceleration starting in Q3 and should continue over the next few quarters,” Mr. Reitzes said.
“Like Google, though, the market seems to believe Apple is a ‘must own’ name if things are tilting in the right direction, so being off in the magnitude of your iPhone predictions in 2014 — even if by a little — means a lot for future expectations.”