Apple seen resisting recession, adding new iPhone models

General Reaction

Needham's Charlie Wolf rated Apple a Strong Buy and titled his report, "The recession bites Apple, but it's only a nick."

"Navigating through a treacherous economy," Wolf wrote, "Apple easily beat its first quarter guidance and consensus estimates."

Wolf, though, believes Mac shipments will be "flat" during fiscal year 2009.  Coupled with a lower assumed gross margin on the iPhone, he lowered his price target from $240 to $200.

Kaufman Brothers' Shaw Wu called the results "impressive execution in a recessionary environment", noting how the Mac maker posted stronger quarterly figures than expected.  "Apple was able to beat estimates despite a very tough macroeconomic environment," he wrote.  "[It was] one of a few companies able to do so."

Wu is keeping Apple rated as a "Buy", joining Gene Munster of Piper Jaffray.  Munster, however, lowered his price target from $235 to $180 due to "reduced estimates".  For his part, Wu kept his target static at $120.

Munster is also revising his long-held prediction that Apple will introduce a new iPhone model.  He originally expected the launch by the end of March.  "We continue to believe there will be a family of iPhones by the end of [2009], but we now expect an additional model to launch this summer," he wrote.  As a result, he pushed the growth curve for the iPhone out "by several months".  Another analyst agreed, as explained later in this article.

Ben Reitzes at Barclays Capital was also encouraged with Apple's results, holding both his Overweight rating and $133 price target still.  

"The only real negatives," Reitzes wrote, "were the company's Retail segment and iPhone channel inventory levels.  Apple's own retail stores fell significantly shy of expectations as sales shifted to non-Apple retailers who discounted...Perhaps Apple is keeping [iPhone] inventory relatively high to satisfy new geographies and partners like Wal-Mart."

Reitzes added that significant cash flow remains very positive for the company.

"We believe the 1Q09 report was very strong and should provide relief for shareholders after the lumpy market data points and concerns over Steve Jobs' health, given the company not only beat fiscal 1Q (bottom AND top line) but also guided above very low Street estimates."

UBS Investment Research's Maynard Um, under the heading "What recession?", revealed that he is keeping his Neutral rating and $110 price target unchanged.  Um warned, however, that Apple could come under pressure on the iPhone in the face of new competitors coming to market since "operators are likely to use competitive products as leverage to negotiate more favorable pricing."

Citigroup very optimistic

Richard Gardner of Citigroup is convinced Apple "will materially exceed its fiscal year 2009 gross margin guidance of 30-31%", given "favorable input pricing" and "a growing contribution from higher margin iPhone revenue and lack of product price cuts".  So convinced, in fact, that he raised his price target from $132 to $147. 

"Despite this morning's rally, valuation continues to look attractive and we reiterate our Buy rating," Gardner wrote.

Dissent from bearish RBC

RBC Capital's Mike Abramsky is not optimistic for the near future, breaking away from the majority of his counterparts.  He has Apple listed with an Underperform rating and "above average risk", with the lowest price target (by $40) of the group at just $70.

"Going forward, Apple's traditional low guidance/high beat may be at risk," wrote Abramsky, "given nominal product catalysts, deteriorating demand, lower margins."

He mentioned slowing iPhone and Mac growth (portables excepted), and wrote, "More scary to us however, was the 25% year over year (22% quarter over quarter) decline in Desktops to 0.7M shipments.  Beyond an ongoing transition from desktops to laptops, deteriorating consumer spending in our view materially contributed to slowing Desktop sales."

Abramsky warned, "With iPhones slowing, iPods saturated, we see a growth 'downshift' for Apple, positioned as premium-priced amidst a worsening global recession - with further demand declines expected ahead".

Reasons for that outlook were "iPhones coming off a 3G product cycle", "forward margins .... expected to decline", and "sluggish US growth, slowing retail store sales, weak education sales", as well as concern as to whether iPod and Mac portables can continue growing.

Waiting for the iPod Phone and iPhone Pro?

Interestingly, Abramsky believes a scaled-back version of the iPhone has "the highest probability of being launched 2009."

"An entry level iPod Phone (voice/SMS, iPod, Wi-Fi but not data plan) could be significant both strategically and financially to Apple," Abramsky wrote.  "Positioned at (estimated) $0-$99, the iPod Phone could leverage broad global retail/carrier distribution, with both prepay and low-cst plans.  It addresses a global opportunity (estimated to be) three to four times as large as iPhone 3G."

Abramsky suggests Apple could sell 21 to 42 million such devices in 2010, ignoring stark comments to the contrary by acting Apple chief executive Tim Cook on Wednesday.

"You know us, we're not going to play in the low-end voice phone business," Cook told analysts on the call, which included Abramsky. "That's not who we are. That's not why we're here. We'll let somebody do that, our goal is not to be the unit share leader in the phone industry. It is to build the best phone."

Meanwhile, Abramsky also suggested that there's an 80% probability of a beefed-up iPhone 3G in the near future.

"Apple could boost iPhone upgrades and global iPhone momentum with a next gen iPhone 3G (HSPA) 'Pro', sporting a faster processor and graphics engine (gaming, video, multitasking), improved camera (resolution, flash, video), higher memory, battery," he wrote.

What about Steve?

Reports from Citi, Needham, Piper Jaffray, and UBS didn't even mention Steve Jobs or his health challenges, while Barclays merely mentioned it in passing as a fear now relieved thanks to the results.  Kaufman Brothers called his health and succession plans "somewhat of an overhang."

Again breaking completely from his competitors, RBC's Mike Abramsky made clear that he considers a "leadership void" to be a significant factor in his valuation.

"Apple offered few new insights regarding CEO Jobs' unexpected Leave of Absence, sustaining near-term uncertainty re leadership," he wrote.  Without mentioning Cook, Abramsky added, "As discussed in our recent downgrade, Jobs is widely viewed as Apple's chief innovator, dealmaker, leader, deeply involved in minute decisions, inextricably tied to Apple's brand."

"Jobs' being sidelined for 6 months or more and unavailable day-to-day — with no clear successor — in our view raises risks to Apple sustaining its stellar record of innovation going forward," he added.

Finally, Abramsky listed "key executives or staff departures" alongside a list of possible impediments to his predicted price target.