Extreme view from one analyst
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AAPL: Sundal Collier Starts at Sell, $400 Target; ‘Cycle of Vogue’ Ending
By Tiernan Ray
Per Lindberg of Oslo, Norway-based investment bank ABGSC Sundal Collier yesterday published a rare thing: an initiation of coverage of Apple (AAPL) with a Sell rating and a $400 price target.
Writes Lindberg in his lengthy report (102 pages), Apple’s products “are no longer unique,” phone companies are looking for alternatives, and customers are “suffering from ‘fashion fatigue’.”
“For all its commercial success, marketing prowess and brand image, Apple is bound to enter a phase of much stiffer competition, far tougher comparisons, and, materially less generous operator subsidies,” writes Lindberg.
Apple’s problems in the last few months with the change in its mapping application is the indication of a broad decline, he suggests:
The maps fiasco – affecting hundreds of millions of users of iOS 6 – serves as a crude reminder that all cycles of vogue eventually come to an end, as spirits of innovation give way to acts of protection – in quite vivid display today. Anticipating sharply decelerating earnings growth next year, followed by absolute erosion thereafter […] At this juncture, there is also another common force which may rouse concerns about Apple to vigorous life. Competitors are stepping up their campaigns to not only close the lead that the Cupertino company has enjoyed, but also to displace it as the architect of the world’s most popular ecosystem of software and services. The facts speak for themselves: (i) Google’s Android outsells Apple’s iOS by a factor of 4-5x in terms of monthly smartphone activations, (ii) Samsung ships nearly twice as many units of smartphones on an annualised basis (with sales values on a par with Apple’s), (iii) the iPad is quickly ceding market share to the tablets powered by Android and Microsoft’s freshly launched Windows 8. The patterns discerned are illuminating and ominous in equal measure. Apple may have fostered the rush of upgrades from feature phones to smartphones and from laptops to tablets through its eye-opening creation of the iPhone and the iPad, but the mass industrialisation process is progressively taken over by others willing to embrace a horizontal model. Unlike Apple, which remains tightly proprietary on both the hardware and software/services fronts, Google and Microsoft are making their ecosystems available to third parties (competitors and customers alike). We take the view that in a market as large, as commoditised and as complex as consumer electronics, open systems will eventually push those that are closed, into obsolescence. The upshot is that the day Apple fails to make leap-frog innovations, then it is highly exposed to wars of attrition in contention with dozens of manufacturers powered by operating systems, value-added applications and online services controlled by its arch-rivals Google and Microsoft. As judged by the lacklustre reception of Apple Maps (wholly inadequate in terms of accuracy and completeness), iPhone 5 (plagued by iOS 6, manufacturing difficulties) and the mini-iPad (a rather immaterial size reduction of iPad 2), there are tangible signs that Apple no longer moves ahead at a pace required to avoid vicious price wars.
Amidst a raft of problems — including “Microsoft (MSFT) getting its act back together with Windows 8? — Lindberg sees substantially lower revenue and earnings per share in coming years versus consensus.
For 2013, Lindberg models $180.6 billion in revenue and $44.90 per share in net profit. That’s below the consensus $193.09 billion, and $49.95 per share.
For 2014, his numbers drop to $186.35 billion and $40.17 per share versus the Street’s average $223 billion and $58.62. Lindberg also sees gross margin that year dropping from 42% in fiscal 2013 to 39%, below the Street’s 41% average estimate.
Lindberg values the stock based on a sum-of-the-parts model, after mapping out what he expects to be revenue declines in each of the company’s divisions by 2020:
Our sum-of-the-parts analysis, extending until 2020, makes explicit assumptions on levels of revenues, operating profits (a proxy of cash), pay-out ratios, return requirements and exit multiples (based on normalised returns at the end of the forecasting period. As set out in the summary table below, we arrive at an aggregate market value of USD ~380bn, equivalent to around USD 390- 400 per share, of which nearly 45% is attributable to the surplus on the balance sheet, around a third to iPhones, about a seventh to other operations, notably the value added applications and services, and a rather modest 6% and 3% to iPads and Macs respectively. It is noteworthy that from the perspective of the enterprise value, the iPhone represents close to 60% of the total, other operations approximately a quarter, leaving ca 15% for hardware design typical traditional computer screens.
Apple shares today are up $3.12, or half a percent, at $588.40.
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