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Analysts say Apple should now be back on the fast track to success

Analysts -- for now -- are willing to give the perrenial performer Apple, Inc. (AAPL) a pass for poorer than expected earnings.  Apple traditionally has surpassed analyst targets for unit sales and its balance sheet.  But in the recent quarter, while growing, it sold 3 million less iPhones and 2 million less iPads than expected (i.e. it grew slower than expected).

For the most part analysts blamed the miss on a ripple-effect triggered by a slow iPhone 4S release (and perhaps, by proxy, co-founder Steven P. Jobs' death).  They nearly unanimously predict Apple will get back on track this quarter.

Goldman Sachs suggests lowered expectations may result in bigger blowouts for Apple:

As consensus estimates are now likely to hug guidance more closely, we expect next quarter’s expectations to remain realistic and perhaps even conservative.

Sterne Agee analyst Shaw Wu remarks:

We are not proud modeling 18.5 million iPhones which turned out higher than actual 17 million shipments but we were materially below consensus of 20 million, not to mention some analysts who assumed as high as 23 million units. It turned out that a concern we raised in our earnings preview (see our 10/12/11 note) that consensus didn't factor in enough of a "product transition" that management talked about was valid (which turned out to be iPhone 4S launching in October).

Likewise Morningstar predicts a big fourth quarter, commenting:

We continue to believe that the capabilities of the new phone, a large base of existing customers ready for renewal, and new price points for existing phones have positioned Apple for tremendous success during the next quarter, which will be 14 weeks long instead of 13 (due to a quirk in Apple’s fiscal reporting calendar).

Bank of America-Merrill Lynch attributes the glitch to "pent-up demand" and suggests that the iPhone 4S will be a smash hit, writing:

Apple missed revenue and EPS due to an underestimated pause in iPhone sales ahead of the 4S launch.  That said, we do not view this as a sign of softening iPhone demand.  In our view, solid pent-up demand, combined with incremental unit sales from new carriers added in F1Q12 (Apple deferred the new carrier addition to F1Q12 because of the iPhone 4S launch) should drive a healthy rebound in iPhone sales.  We remain buyers of the stock heading into perhaps the most successful product launch in company history, with the iPhone 4S.
iPhone 4S

Piper Jaffray analyst Gene Munster suggests that some customers are playing the waiting game, hoping to upgrade to an iPhone 5 next summer.  But he says a more-bullish-than-usual earnings guidance from Apple for calendar Q4 2011 could point to a blowout quarter.  He comments:

We see this as a disappointment, but given the strong start to iPhone 4S sales, we believe it is clear that units were pushed from the Sept. quarter into the Dec. quarter as customers waited for the "iPhone 5"...  We believe Apple's Dec-11 quarter guidance is evidence of the company's confidence in iPhone 4S and iPad sales in the Dec-11 quarter.

Morgan Stanley's Katy Huberty was similarly bullish dismissing the miss as a "hiccup".  She writes:

We believe the Street underestimated the degree to which September was a transitional quarter for the iPhone but with strong iPhone momentum out of the gate in October, we don’t see the light iPhone shipments as a cause for concern... [L]ower than expected uptick in iPad shipments was the only real "flaw" [in the quarter].

She predicts the company's stock to rise 14 percent within the next year, reaching around $480 USD/share.

II. Some Analysts are Less Cheerful

A few analysts reacted with a bit more pessimism. RBC Capital Markets analyst Mike Abramsky suggested Apple was going through a "transitional" state and suggests "strong catalysts ahead".  Yet he suggests that Q4 earnings may miss Apple's guidance, unlike many of his colleagues.  He predicts Apple to pull in $34B USD in revenue that quarter, versus the guidance of $37B USD.

Alex Gauna of JMP Securities, suggests that investors shouldn't be so quick to write off Apple's "hiccup".  He comments:

Although we anticipate widespread dismissal of the miss as a product transition wrinkle rather than a trend, we view the blow to the company’s sterling track record as significant and caution investors that, 1) Apple remains a high cost/premium vendor in an economically-sensitive environment, 2) Android is growing share more rapidly owing to a lower cost structure and supports more open development, 3) the company has now had a second stumble right out of the box under new management (the first being the iPhone launch), and 4) the company has a high risk vertical approach to many of its products.

We advise not being too quick to dismiss the iPhone miss on product transition issues, as we believe this is going to be a recurring theme for Apple given the limited scope of variety it offers in the handset and tablet categories. We would also have expected this effect to be more muted in overseas markets that are newer adopters of the devices and the majority driver of Apple growth.

Early reads on iPhone 4S sales are truly impressive, but the device is not so dramatic a departure from the prior generation iPhone 4 as to give us confidence that this device can usher back in sales reacceleration.  We continue to expect a 4G iPad refresh to arrive before a 4G iPhone in 2012, although little color has emerged regarding what will make them special beyond being 4G.

The implications of an Apple miss means more than is typical, given the importance of its aura of brilliance in sustaining premium price points and product loyalty.  This will likely also add to wellplaced investor anxiety around how the company sustains its momentum under new leadership.

Similarly Collin Gillis of BGC Partners rained on the pro-Apple parade issuing a rare downgrade to Apple's stock.  He explains:

We no longer suggest being overweight shares of AAPL and see that near-term downside risk overweighs upside reward. Shares have gained 14% since October 7, and increased 31% year-to-date. With the largest market capitalization for a U.S based company at $391 billion, any hiccup in its growth is likely to provide an opportunity to add to positions at a better price.

The company has to constantly set records just to meet expectations. There is nothing wrong with Apple’s business model or execution, but we do see that sentiment is overwhelmingly positive and shares are within 7% of our $450 price target. We believe that it is possible shares pullback below $400, possibly even this week after the earnings report on Tuesday post-market, and we would seek to be buyers at levels below $400. While there is a sea of love in the press for Apple currently, we voice the following notes of caution:

1) Impact of the pending launch of the iPhone 4S on sales in the Sep. quarter. Consensus estimates of 20 million phones sold may prove difficult to exceed given the launch of the 4S phone in the December quarter. While the company did an excellent job at delaying any discussion of a new phone until after the quarter ended, it is worth recalling that this September results have a phone that was at the end of its refresh cycle, not the start of a new one – as has been the case in September quarters in the years past.

2) Education discounts. September quarter margins also run a risk from impact due to education pricing discounts. Cost of revenue last year in the September quarter increased notably from 60.9% to 63.1% sequentially. While this was also driven by the launch of the iPhone4, it is worth mentioning that the September quarter does contain the most impact to margins from educational buying.

3) iPads. Our largest concern is centered around tablets, however. There is limited history of how seasonality and product refresh is going to impact sales of iPads, and consensus estimates of 11.5 million units sold assumes another record shattering. As the iPad is Apple’s second most meaningful revenue stream after the iPhone, if the company does not continue to set mindblowing records (iPads sales account for over 10% of worldwide PC sales just five quarters after launch) it is going to be difficult for the other parts of the business to cover the gap.

Finally, low-cost tablets from competitors willing to lose profit to gain market share are going to incrementally hurt sales of the iPad in our opinion.

Investors reacted in a similar bearish fashion depressing the stock $20 or more in trading today (~4.5-5 percent).

Apple is currently grappling with a leadership transition and preparing the iPhone 5.  To launch next summer, the iPhone 5 is rumored to be the last major project Steve Jobs directed.  The device is expected to be a major overhaul of the popular smartphone design.

Sources: WSJ [1], [2], Apple Insider

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Die investors
By gwidionx on 10/19/2011 3:01:50 PM , Rating: 4
Man, I'm tired of always hearing investors and economists whine about "poor performance" because something did not GROW 10,000% like they hoped and dreamed it would. What a bunch of babies. Get your head out of your a**.

RE: Die investors
By Chadder007 on 10/19/2011 3:57:08 PM , Rating: 2
Its as if the Analysts are planting a story to be able to short the stock in case it doesn't live up the the 10 fold profit they like to forcast that isn't possible. ;)

RE: Die investors
By Mizerable on 10/19/2011 5:20:53 PM , Rating: 5
You're getting it totally wrong... Investors have priced in the expected growth of a company into its current stock price. Meaning, people pay 400 bux for a share of Apple ASSUMING it grows at x% per year. If the actual growth is lower than x% then you overpaid duh. That's why stock prices can fall even though you have positive growth.

RE: Die investors
By spread on 10/19/11, Rating: 0
RE: Die investors
By augiem on 10/20/2011 1:49:37 PM , Rating: 1
He's not getting it wrong at all. The core is they complain about "poor performance" when their expectations are TOO HIGH. Just because ludicrous growth expectations are built into a stock's price does not make them any less ludicrous.

RE: Die investors
By Shadowself on 10/19/2011 6:52:37 PM , Rating: 5
It's not the investors themselves. It's investors -- especially the institutional investors -- listening to the analysts.

The reality is that Apple beat the predictions by these same analysts something like 28 quarters in a row. The analysts have been slowly hiking up their predictions trying to not look stupid and Apple still beat their predictions. Finally, the analysts *really* hiked up their predictions with no real basis to do so. (What sane person thought Apple was going to have such a fantastic quarter as predicted?)

When Apple failed to meet the most recent, radically inflated predictions, Wall Street blamed it on Apple in general. Then they blamed it on the delay of the 4S. Then they claimed it was the resignation of Jobs and people holding off buying Apple stuff because no one knew where Apple was going. Then they claimed Apple was "channel stuffing" in calendar Q1 and calendar Q2 leaving calendar Q3 to be lower than predicted through absolutely no fault of the analysts own. (Clearly Apple intentionally deceived them!) Who knows what excuse they analysts will use next? The newly proposed Apple headquarters is really planned as a refugee site for Martians?

Folks are waiting for the iPhone 5
By LBID on 10/19/2011 2:49:31 PM , Rating: 2
I would tend to agree with the bearish sentiment. Although a lot of pent-up demand on the Verizon network will be met by the 4S, I think many customers are already looking ahead to the iPhone 5. It's the true successor, and will also have the nostalgia factor of being Steve Jobs' last big project.

RE: Folks are waiting for the iPhone 5
By quiksilvr on 10/19/2011 3:02:41 PM , Rating: 2
Actually that would have been this phone. 4 million purchases in 24 hours? Considering the lackluster response the 4S had before his death, no one saw that coming.

Steve Jobs' death (in combination with it being available on Sprint) were the real factors in its burst of popularity.

The two things that most consumers want in a new iPhone:
1) A wider and/or larger screen
2) True HSPA+ / LTE capabilities. Verizon customers already have an iPhone 4 with CDMA, they don't need another one.

By Iaiken on 10/19/2011 3:49:58 PM , Rating: 4
1) A wider and/or larger screen

They can want all they like, it's just not going to happen for a long list of reasons:

1. Apple has locked themselves into a 3:2 aspect ratio that very quickly becomes too wide to be held comfortably if increased beyond a 4" diagonal screen size.

2. At a 4" diagonal and 960 x 640 pixel dimensions, the PPI drops to around 288, far lower than the 326 ppi required for it to qualify as a "Retina Display".

3. To maintain the same approximate PPI level required to be considered a "Retina Display", they would have to use a custom resolution of 1080x720.

4. Practically all iPhone apps are simply up-scaled on a 1:2 pixel basis with AA to round off corners and smooth out jaggies. Any attempts to upscale around odd pixel ratios such as 1:1.25 would result in terrible appearance problems as pixels would be the product of interpolation.

5. So instead of interpolating the additional 12.5% of pixels they would need the developers to redesign all of the existing apps for two resolutions. While the ease of simply doubling the pixel count made the move to 960x640 optional, a redesign for such and odd resolution would have to be made mandatory.

So they are kind of f***ed...

RE: Folks are waiting for the iPhone 5
By JackBurton on 10/19/2011 6:14:24 PM , Rating: 2
The two things that most consumers want in a new iPhone: 1) A wider and/or larger screen 2) True HSPA+ / LTE capabilities. Verizon customers already have an iPhone 4 with CDMA, they don't need another one.

1) No they don't. I for one LOVE the size of the iPhone 4/4S and don't want them to increase the size. It's a freakin' phone, not a tablet. If I wanted a larger screen, I'd dump the image to my TV via AirPlay. I definitely do NOT want to carry around a big bulky phone.

2) The technology wasn't at the point it needed to be for the iPhone 4S. I'm sure it will be in the iPhone 5.

By Solandri on 10/20/2011 2:44:37 AM , Rating: 2
1) No they don't. I for one LOVE the size of the iPhone 4/4S and don't want them to increase the size. It's a freakin' phone, not a tablet.

It's interesting that you as an iPhone user immediately assumed there could be one and only one version of the iPhone.

The obvious solution to this conundrum is to release different versions of the phones, a 3" version, a 3.5", a 4.0", and 4.5" or even 5" versions. Ok, maybe 5 versions is too much, but surely they can release a 3.5" and 4.5" versions. Then you can buy whichever size you like most. Kinda like what happens with Android phones.

That's not Apple's way though. They know best what's good for you.

RE: Folks are waiting for the iPhone 5
By spread on 10/19/2011 6:49:19 PM , Rating: 2
True HSPA+ / LTE capabilities.

AT&T is working with Apple to show a 4G notification instead of a 3G while on the AT&T network.

It's not really a 4G network.

By vol7ron on 10/19/2011 10:00:55 PM , Rating: 2
It is and it isn't. HSPA+ is pretty decent, but LTE is the one we want to wait for (when it goes to 4x4MIMO), right now LTE is only at 2x2MIMO so, it's still not at its potential. However, the best benefit is about 2/3 the ping of where HSPA+ is right now. Part of the reason the internet seems slow on phones these days is due to the initial connection time (pause before it starts loading), which is what the ping really identifies. Lower ping, faster connection, and so faster overall load time.

thanks Wall Street
By senbassador on 10/19/2011 3:52:14 PM , Rating: 2
Thank you Wall Street. Congratulations, you've done the impossible. You've managed to make me side with the Apple fan boys.

RE: thanks Wall Street
By spread on 10/19/2011 6:50:41 PM , Rating: 3
If there's anyone I hate more than Apple it's the Wall Street analysts. They couldn't analyze themselves out of a paper bag.

The enemy of my enemy is my friend.

By name99 on 10/19/2011 8:06:38 PM , Rating: 4
But in the recent quarter, while growing, it sold 3 million less iPhones and 2 million less iPads than expected (i.e. it grew slower than expected).

For the most part analysts blamed the miss on

Let's get honest here. APPLE provided guidelines as to the quarter and it met those guidelines. ANALYSTS stated random made up numbers of their own, and are now pissed off that Apple didn't make those made up numbers? I'm a little confused as to why this is a story.

How about this? I'll claim that Google expects to sell 3.9 billion Android devices in 4Q2011. Then when Google doesn't sell that many, you can run a story about how I, an "analyst", am "disappointed" in Google's "lackluster performance" and "worry that this may mean the inevitable end of the Android craze".

By Rhaido on 10/19/2011 3:11:05 PM , Rating: 2
"I have received SO MUCH flack over the last year for pointing out the obvious FACT that Apple's phenomenal growth will be hit by Android's extra-phenomenal growth, it has been borderline disheartening. Well, the time is hear folks, and as is usual, logic. common sense and rational thinking rule the day once again."

I am indifferent to Apple but some of you might find this worth reading.

Wall Street upset about something?
By Belard on 10/20/2011 2:54:53 AM , Rating: 2
Like anyone should listen to every word that wallstreet says?

They are unhappy with the block-buster sales of Apple iPhones and iPads when there is nothing else on the market that is selling as well, from a single company?

This guys are stupid. They are deranged as much as Rush Limbaugh is a homosexual.

Goldman Sachs.
By dark matter on 10/20/2011 4:15:20 PM , Rating: 2
Need to look at their own bloody balance sheet before passing judgement...

Who are these clowns, and why are we letting ourselves get shafted by them.

Asymco nails it as usual
By Tony Swash on 10/19/11, Rating: -1
RE: Asymco nails it as usual
By sprockkets on 10/19/2011 3:58:51 PM , Rating: 3
Thank you for quoting from a site that only reports good news about apple and never about android.

Even though he claims to always base his analysis on facts only reporting half the story isn't unbiased either.

RE: Asymco nails it as usual
By xti on 10/19/2011 5:56:28 PM , Rating: 2
concept sounds familiar, just opposite...i know its somewhere around here...

RE: Asymco nails it as usual
By Tony Swash on 10/19/11, Rating: -1
RE: Asymco nails it as usual
By sprockkets on 10/19/2011 11:46:25 PM , Rating: 2
Uh huh. His front page is all analysis about the icloud, apple's stores, apple's "factories", whatever that means, and of course their market share from cook's perspective.

Not biased at all. Doesn't mean he is wrong, but obviously you won't find any news about how great other people are doing unless it has a fruity logo on it.

RE: Asymco nails it as usual
By spread on 10/19/2011 6:51:23 PM , Rating: 2
Don't you have some dicks to suck Tony? Or are you done for the day?

RE: Asymco nails it as usual
By Tony Swash on 10/19/11, Rating: -1
RE: Asymco nails it as usual
By shane.carroll on 10/19/2011 7:37:11 PM , Rating: 2
its funny that you tell others to get in touch with reality so much while you live in a fantasy land led by the apple god where no other tech company has ever invented any of use ever. people like you make ALL apple consumers look like retards who cant think for themselves

RE: Asymco nails it as usual
By ShaolinSoccer on 10/19/2011 8:20:27 PM , Rating: 2
You mean a reality kinda like this?

I hope you still have some of that Steve Jobs magical fairy dust left over to help break the fall.

RE: Asymco nails it as usual
By spread on 10/19/2011 10:46:18 PM , Rating: 2
Dude, I'll listen and consider pretty much everyone but you and people who wear tinfoil hats and talk about reptilians in the government. To me you're in the same club, you just don't know it.

You worship some twisted ideal that offers nothing and let it mold you. You are an excellent cult member, seldom thinking for yourself and often absorbing and regurgitating the same mantra.

Don't forget to wake up early to suck those dicks Tony! Suck and swallow the warm creamy sadness that is your life.

RE: Asymco nails it as usual
By Tony Swash on 10/20/11, Rating: 0
RE: Asymco nails it as usual
By spread on 10/20/2011 7:14:49 AM , Rating: 2
I understand how scared you guys are and how really upset you are by Apple.

We really don't care dude. What pisses off people is when you become a cheerleader for your favourite company and start chanting their bull. That gets very annoying very fast, it doesn't matter what the company or the product it. We don't want to hear that.

blah blah blah, lots of words without meaning. blah blah blah

See what I mean? This kind of stuff is annoying to read.

I urge you to lose the fear and anger and just try to understand the world as it is. Even if it is sometimes not as you wish. Otherwise you will spend your lives in a froth of disgruntled ignorance. Which is not good.

Oh really, how is the world? It's interesting how a man with such a well seasoned world view will spend his time trolling Dailytech and getting into arguments with anyone who dares say they don't like Apple.

Oh, you're here to raise the veil of ignorance but you don't see your own. Luckily just as you can see when other people are ignorant, so can other people see when you are ignorant. And you have plenty to work on dude. Why don't you do something with your life? Apple won't be around forever dude, what will you do when you can't suck on the penis of Apple? Jobs is dead, so you can't suck his penis anymore and tell everyone about how good it tastes.

RE: Asymco nails it as usual
By Tony Swash on 10/20/11, Rating: 0
RE: Asymco nails it as usual
By spread on 10/20/2011 10:04:47 PM , Rating: 2

Thanks, I try.

RE: Asymco nails it as usual
By Cheesew1z69 on 10/20/2011 10:23:58 AM , Rating: 1
I understand how scared you guys are and how really upset you are by Apple.
Gee, once again, go figure! Same bullshit as usual.

"The whole principle [of censorship] is wrong. It's like demanding that grown men live on skim milk because the baby can't have steak." -- Robert Heinlein

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