The Street Isn't Recognizing The Strength Of Tech Data's Apple Ties

Tech Data Corp TECD shares are taking a severe hit following the release of its July quarter results, which were softer than expected. Even as negativity engulfs the stock, Loop Capital Markets delved on the company's Apple Inc. AAPL relationship, which it feels has yet to be fully appreciated.

As such, the firm reiterated its Buy rating on the shares of the company, suggesting that it would use the weakness following the quarterly report to add to positions. However, the firm lowered the price target from $130 to $120, though it continues to believe that Tech Data has much greater potential.

At the time of writing, shares of Tech Data were tumbling 18.49 percent to a 4.5-month low of $89.90.

Bottom-Line Underperformance

On the quarterly results, analyst Ananda Baruah noted that revenues of $8.9 billion exceeded the Street estimate of $8.8 billion but earnings per share of $1.7 trailed the consensus of $2.06. The analyst also noted that the company's October revenue guidance was above-consensus, while earnings guidance was sub-par.

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Diagnosing the reason for the divergence, the analyst identified a trio of factors, namely softer than expected gross margin from some areas, mainly in PCs, less rebating than anticipated and softer component margins.

"We believe the dynamics that impacted TECD's results manifested in the last eight weeks of the quarter, and were a combination market related such as a more competitive PC environment and end market softness in enterprise areas placing rebate kickers out of reach which will ultimately adjust, and some operational growing pains as TECD and the acquired Avnet business continue to learn from each other," the firm explained.

The Apple Boost

Loop Capital Markets indicated that Apple currently accounts for 12 percent of Tech Data's revenues, with the proportion having been as high as 24 percent depending on the iPhone product cycles.

The firm thinks Tech Data is likely well positioned ahead of the iPhone 8 launch, as Apple cleared about $3.3 billion of high-end iPhone inventory in its June quarter. Explaining the Apple-boost for Tech Data, the firm said normalized iPhone revenue accounted for one-third of Tech Data's revenues from Apple. Tech Data sells the complete Apple portfolio, the firm added.

The firm also believes Tech Data continued to gain share inside Apple itself. Lastly, the firm said Tech Data has evolved as an important partner for Apple, driving the Mac into commercial environments, as Apple is likely to rely entirely on partners.

Loop Capital Markets believes Tech Data could be a $145 stock if it continues to execute into 2020.