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Why This Analyst Thinks Apple Will Miss -- and Why It's a Buy

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The next few months are going to be tough for Apple (NASDAQ: AAPL  ) investors, as if the last few haven't been tough enough. Amid investor pessimism, this time of year is seasonally slow for Apple.

The company used to unveil new iPad models in the spring, which could give it a boost earlier in the year, with new iPhones in the fall to carry it into the holiday shopping season. That's up in the air right now, as the iPad product cycle is anyone's guess at this point. Throw in the fact that Apple is now being rather honest with its guidance forecasts, and investors are contemplating the distinct possibility of earnings misses over the next two releases. Citigroup has been pondering the same thing.

Even though BTIG Research thinks misses are in store for both the March and June quarters, analyst Walter Piecyk has still gone ahead and upgraded shares to "buy" and slapped a $540 price target on the iPhone maker.

June bug
Piecyk's estimates for the March and June quarters are below consensus estimates, and the company's June guidance is a risk factor in itself when it announces earnings in April. Results for the June quarter could come under pressure from rival product introductions. Samsung is unveiling its Galaxy S IV today, HTC showed off its new One earlier this month, and BlackBerry (NASDAQ: BBRY  ) is also launching its Z10 in the U.S. during March. Both AT&T and Verizon have now announced pricing and availability of the Z10, which will compete on the high-end at $200 on contract.

BTIG notes that tightened carrier upgrade policies weighed on Apple's iPhone sales in 2012. While slow upgrades were a headwind last year, that could turn into a tailwind in 2013. Investors were pleasantly surprised by the overwhelming interest that the iPhone 4S garnered when it launched in 2011, particularly after skeptics derided it as an incremental upgrade (which it was). But that also means that iPhone 4S buyers are quickly approaching upgrade eligibility within the next couple of months, and if there's one thing investors know about Apple customers, it's that they're a remarkably loyal crowd.

Samsung, HTC, and BlackBerry, among other rivals, will be working hard to win those smartphone shoppers over, but an imminent iPhone 5S may hold them at bay.

It's worth noting that BTIG downgraded Apple last April at a time when it saw strong quarters ahead, so upgrading ahead of a weak quarter is the flip side of that equation. Disappointing June guidance could easily knock shares down below $400, but Piecyk still thinks that's a risk worth taking considering the potential upside.

What's the rush?
BTIG expects a low-cost iPhone to be launched this year, but is not including the possibility of a larger iPhone in its estimates. The niche phablet trend is undeniably growing, but BTIG thinks that Apple can bide its time due to its brand awareness and differentiated software experience. The sales data also imply there's no rush.

The analyst also believes a cash-related announcement is due out this month, which echoes what other analysts are expecting since it's been a year since the last cash call. BTIG sees the cash question as more of a management issue. If no dividend materializes, management will be heavily scrutinized for failing to return more cash. BTIG is modeling for Apple's hoard to grow to $144 billion by the end of the March quarter.

A $5 billion freebie
BTIG's fiscal 2014 estimates include an extra $5 billion in revenue for an "unspecified new product." That's a big freebie that amounts to a vote of confidence in the company. There's no shortage of possibilities of what Apple may have up its sleeve, so this $5 billion in sales could come from just about anywhere.

That may seem to be a generous freebie, but $5 billion is actually rather conservative for new product categories. Morgan Stanley's Katy Huberty recently estimated that an iWatch could turn into at least $10 billion in incremental revenue, and an iTV could add $17 billion to the top line. That's before even considering new services that Apple could launch, like a mobile payment option.

Google (NASDAQ: GOOGL  ) may have the upper hand in a lot of ways with cloud services (like Maps and Gmail), but BTIG notes that Android's fragmentation limits the reach of new services that the search giant introduces because so many users are stuck on old versions. Meanwhile, Apple is extremely efficient at upgrading users to the newest versions of iOS, so new services can potentially reach higher penetration levels much faster.

R-E-S-P-E-C-T, find out what it means to me
The $540 price target is derived from an earnings multiple of 12 and fiscal 2014 EPS estimate of $45. That would require some multiple expansion from its current P/E of just 9.8, even as that EPS estimate represents modest growth from Apple's current $44.11 in trailing EPS. New growth opportunities in affordable iPhones and new product categories that can drive growth beyond 2014 will be key to earning more respect from the Street.

There is a debate raging as to whether Apple remains a buy. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on both reasons to buy and reasons to sell Apple, and what opportunities are left for the company (and your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.

Read/Post Comments (5) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 14, 2013, at 9:41 PM, daveandrae wrote:

    I could not disagree more.

    First of all, know one knows, including the management of Apple themselves, how much money they're going to earn in 2014. To pontificate otherwise is smack talking nonsense.

    Second, when one takes a hard look at Apple's earnings over the last five years, (2012-2008) the average, aggregate number is much, much, closer to 15 dollars a share, not "45." Thus, if one were to put a price to earnings multiple of 12 on the five year average, which is the only way to ignore peak earnings, the stock is STILL way overpriced!

    Third, general sentiment is still way too bullish. Which tells me that not only are margin buyers still hanging on, (by a thread), to their positions, but further downside surprises, and thus principal capital risk, is still far greater than potential, capital, appreciation.

    Taken in agglomeration, and its obvious to me that this is NOT the bottom. We're not even close.

    Good Day.

  • Report this Comment On March 14, 2013, at 9:55 PM, Oril wrote:

    Wow forecasting an earnings miss but still remains a buy. This fool kid is sure in over his head.

    I hope no one is paying him to write this crap but someone at apple likely is.

  • Report this Comment On March 15, 2013, at 1:08 AM, croggsbooks wrote:

    Sometimes people hold onto their stocks for longer than a few months. Also, earnings estimates aren't always that huge of a deal. If they miss this quarter, but have optimistic guidance, then the stock will probably go up at the release. If they miss, but they make an announcement about a cheaper Iphone, a phablet, or something imminent happening with China Mobile, then Apple will probably be higher after the miss than it is today.

    This isn't to say that Apple is an indisputable, screaming BUY. However, buying a stock and predicting a stock might miss estimates aren't necessarily mutually exclusive. Obviously, it would be more ideal for Apple to have a blowout quarter and crush estimates. However, if someone is planning on holding a stock for a few years, then a miss really shouldn't be a big deal.

  • Report this Comment On March 15, 2013, at 2:00 AM, NOTvuffett wrote:

    In the past, AAPL has been guilty of sand-bagging on their guidance. So when earnings numbers came in, they looked like a star. Now the current management seems to have rethought this strategy.

    AAPL looks attractive now by most metrics.

  • Report this Comment On March 15, 2013, at 8:17 AM, gettmoney wrote:

    the fools been saying apple is a buy @600, @500, and still it's a, apple can't be a sell I guess

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