We downgrade Apple Inc. (AAPL) to Neutral from our previous Outperform rating, given the European crisis, iPhone and iPad supply chain constraints and a cannibalization effect from the iPad.
Despite the impressive first nine months of 2010, which had beaten analysts' expectations by a wide margin, Wall Street expects Apple's revenues and earnings growth to slow down over the next few quarters.
Wall Street analysts anticipate revenue growth of 37%, 30% and 16% for the first three quarters of 2011, while earnings per share growth is expected to fall 33%, 16% and 14%, respectively, over the same period. This could be the result of intense competition from Google Inc.'s (GOOG) Android-based phones and tablet PCs that could hurt margins and lower Apple's market share.
Although the smartphone market is primarily dominated by Apple's iPhone, increased popularity of Google's Android mobile operating system poses a threat to Apple. According to a recent report by IDC, Apple's iPhone market share is expected to drop from the 14.7% previously expected to 10.9% by 2014 due to the growing threats of high-subscription fees and stiff competition from lower-priced Android handsets that will take up 24.6% market share by then.
Apple's operating expenses have been steadily going up (increased 12.6% in fiscal 2009), which we fear could hurt earnings growth in the near term. Apple's investment in research and development (3.1% of total revenue in 2009 versus 3.0% of total revenue in 2008) grew on a dollar basis by 20.2% in 2009 over 2008 levels.
However, compared with its competitors such as Microsoft Corp. (MSFT), International Business Machines Corp. (IBM), Research in Motion (RIMM) and Motorola Corp. (MOT), Apple has invested less in R&D. We expect Apple to profoundly increase its selling and R&D expenses, going forward, in order to maintain its technology lead, thus hurting margins.
Third Quarter Highlights
Apple's strong third quarter 2010 results, given out in July, beat the Zacks Consensus Estimate. The upbeat quarter results were fueled by strong iPhone sales, record Mac sales, increased iPad sales and success of new product launches.
Earnings in the quarter were a record at $3.51 per share, easily exceeding the Zacks Consensus Estimate of $3.08 and surpassing the company's own guidance of $2.28 to $2.39 per share. Earnings shot up 74.6% from $2.01 per share reported in the year-ago quarter. Net income soared to $3.25 billion in the quarter, a substantial growth of 78% from $1.83 billion in the year-ago quarter.
Strong earnings were attributable to record sales in the quarter, which leaped 61.3% year over year to $15.70 billion. The quarter generated highest quarterly revenues in the company's history. This mammoth revenue growth was driven by an increased momentum in Mac shipments and strong iPhone sales, in addition to better-than-expected sales of iPad.
Estimates Move in Both Directions
Although analysts estimate have moved in both positive and negative direction, the overall Consensus remains positive. Of the 41 analysts covering the stock, 8 have revised their estimates upward, while 2 have made a downward revision to their estimates in the last 30 days for the fourth quarter of 2010.
For the fourth quarter of fiscal 2010, Apple expects earnings to come at approximately $3.44 per share compared with $1.82 per share in the year-ago quarter, as provided during the last earnings release. The Zacks Consensus Estimate for the fourth quarter is $3.97 per share. Over the last 60 days (since the company released its third quarter results), analysts have reduced their estimates by 1 cent from $3.98 per share.
We expect future growth to come from the success of iPhone 4 and iPad and increased Mac shipments. With a loyal customer base, international expansion into new markets, competitive pricing strategy and new product launches, we remain positive on its long-term growth. We remain upbeat on Apple's unrelenting efforts to revamp its product line.
We remain optimistic on Apple's ability to post stronger results in 2011. While Apple has various positive attributes, we believe these have been already priced into the shares leaving little room for an upside.
APPLE INC (AAPL): Free Stock Analysis Report
GOOGLE INC-CL A (GOOG): Free Stock Analysis Report
INTL BUS MACH (IBM): Free Stock Analysis Report
MOTOROLA INC (MOT): Free Stock Analysis Report
MICROSOFT CORP (MSFT): Free Stock Analysis Report
RESEARCH IN MOT (RIMM): Free Stock Analysis Report
Zacks Investment Research
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Wall Street analysts anticipate revenue growth of 37%, 30% and 16% for the first three quarters of 2011, while earnings per share growth is expected to fall 33%, 16% and 14%, respectively, over the same period. This could be the result of intense competition from Google Inc.'s (GOOG) Android-based phones and tablet PCs that could hurt margins and lower Apple's market share.
Although the smartphone market is primarily dominated by Apple's iPhone, increased popularity of Google's Android mobile operating system poses a threat to Apple. According to a recent report by IDC, Apple's iPhone market share is expected to drop from the 14.7% previously expected to 10.9% by 2014 due to the growing threats of high-subscription fees and stiff competition from lower-priced Android handsets that will take up 24.6% market share by then.
Apple's operating expenses have been steadily going up (increased 12.6% in fiscal 2009), which we fear could hurt earnings growth in the near term. Apple's investment in research and development (3.1% of total revenue in 2009 versus 3.0% of total revenue in 2008) grew on a dollar basis by 20.2% in 2009 over 2008 levels.
However, compared with its competitors such as Microsoft Corp. (MSFT), International Business Machines Corp. (IBM), Research in Motion (RIMM) and Motorola Corp. (MOT), Apple has invested less in R&D. We expect Apple to profoundly increase its selling and R&D expenses, going forward, in order to maintain its technology lead, thus hurting margins.
Third Quarter Highlights
Apple's strong third quarter 2010 results, given out in July, beat the Zacks Consensus Estimate. The upbeat quarter results were fueled by strong iPhone sales, record Mac sales, increased iPad sales and success of new product launches.
Earnings in the quarter were a record at $3.51 per share, easily exceeding the Zacks Consensus Estimate of $3.08 and surpassing the company's own guidance of $2.28 to $2.39 per share. Earnings shot up 74.6% from $2.01 per share reported in the year-ago quarter. Net income soared to $3.25 billion in the quarter, a substantial growth of 78% from $1.83 billion in the year-ago quarter.
Strong earnings were attributable to record sales in the quarter, which leaped 61.3% year over year to $15.70 billion. The quarter generated highest quarterly revenues in the company's history. This mammoth revenue growth was driven by an increased momentum in Mac shipments and strong iPhone sales, in addition to better-than-expected sales of iPad.
Estimates Move in Both Directions
Although analysts estimate have moved in both positive and negative direction, the overall Consensus remains positive. Of the 41 analysts covering the stock, 8 have revised their estimates upward, while 2 have made a downward revision to their estimates in the last 30 days for the fourth quarter of 2010.
For the fourth quarter of fiscal 2010, Apple expects earnings to come at approximately $3.44 per share compared with $1.82 per share in the year-ago quarter, as provided during the last earnings release. The Zacks Consensus Estimate for the fourth quarter is $3.97 per share. Over the last 60 days (since the company released its third quarter results), analysts have reduced their estimates by 1 cent from $3.98 per share.
We expect future growth to come from the success of iPhone 4 and iPad and increased Mac shipments. With a loyal customer base, international expansion into new markets, competitive pricing strategy and new product launches, we remain positive on its long-term growth. We remain upbeat on Apple's unrelenting efforts to revamp its product line.
We remain optimistic on Apple's ability to post stronger results in 2011. While Apple has various positive attributes, we believe these have been already priced into the shares leaving little room for an upside.
APPLE INC (AAPL): Free Stock Analysis Report
GOOGLE INC-CL A (GOOG): Free Stock Analysis Report
INTL BUS MACH (IBM): Free Stock Analysis Report
MOTOROLA INC (MOT): Free Stock Analysis Report
MICROSOFT CORP (MSFT): Free Stock Analysis Report
RESEARCH IN MOT (RIMM): Free Stock Analysis Report
Zacks Investment Research
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