After Apple’s weaker than expected quarter, Goldman Sachs analyst Bill Shope is cutting his price target on the stock to $790 from $850.Shope still considers Apple a “conviction buy” despite the price chop.
Here’s the high-level takeaway from the note:
“While we had expected some weakness as a result of a pause in iPhone demand ahead of the iPhone 5 refresh, the impact was greater than we anticipated. In addition, Apple’s gross margin performance and macro commentary served as key sources of disappointment.”
As bad it sounds, Shope thinks any drop in share price will be, “very short-term in nature, and we suspect the stock will rebound quickly.”
Here, in more detail, are Shope’s concerns about Apple. Anything is quotes are his words:
- “The pause ahead of iPhone 5 was even more pronounced than expected.” While Apple was expected to sell fewer iPhones, “the shortfall for the June quarter and the September quarter was far more pronounced than we expected.” In addition, the ASP for iPhones has fallen, suggesting users are buying the cheaper version of the iPhone.
- Gross margins are “Key points of incremental concern”: Gross margin was 42.8% versus consensus of 43.5%. The lower priced iPhone coupled with lower priced iPads affected margins. However, Shope thinks gross margins should recover by December.
- Apple’s “macro comments” are worrying: “Our sense is that Apple’s management spent more time discussing macro pressures than in any other quarter over the past decade, with the notable exception being the September quarter of 2008.” The weaker economy in Europe is a reason to be worried about Apple’s future performance.
- While this was a bad quarter, it doesn’t change Shope’s fundamental belief in the Apple business: “While several elements of Apple’s June quarter results were surprising and disappointing to us, we believe most of these issues are temporary. In fact, we believe the December quarter will enjoy a tailwind from the iPhone 5 and consumer seasonality that will likely quickly eliminate current investor concerns. In addition, we saw no evidence in this quarter’s results that Apple’s platform momentum or the related customer loyalty and market share potential were damaged in any way.”
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