Neutral On Apple Stock: Positives Already Priced In

Apple Inc. (AAPL) has undergone a total turnaround. The first nine months of 2009 is evidence of this trend as both revenue and earnings exhibited growth, beating the Zacks Consensus estimate and the company’s own guidance.

The main growth driver for Apple is its increased Mac shipments and higher iPhone sales. The company’s Macintosh product continues to gain market share, with significant gains in portables, music players and smartphones.

We believe the strong growth at Apple is primarily driven by increased revenue contribution from iPhone, which has exceeded our estimates. Meanwhile, strong revenue growth has also driven margins and resulted in significantly higher earnings.

However, the company provided a cautious revenue outlook for the upcoming quarter due to the global crisis followed by lower consumer spending. A weak MP3 market has also led to lower iPod sales. Although demand for traditional MP3 players could continue to decline, it should be offset by growth in more advanced units such as iPod Touch.

Apple faces significant competition in all areas of its business-PCs, MP3 players and cellular phones. Its Mac OS has a very small share of the personal computer market, which is dominated by Microsoft’s (MSFT) Windows and Hewlett-Packard’s (HPQ) HP UX.

Although the company is a market leader in the iPod line, it faces competition from Microsoft’s Zune and Sandisk’s (SNDK) Sansa player. Finally, in the cellular phones segment, Apple has a strong product in the iPhone but is pitted against Research In Motion’s (RIMM) Blackberry, Palm’s (PALM) Pre and Nokia (NOK).

We believe Apple is likely to gain some share in the enterprise market through its compelling products but remain on the sidelines due to the macro uncertainty, weak consumer spending and intense competition. We expect the company to trade at a significant premium to its peers.

We believe the positives for Apple are already priced into its shares, and therefore maintain our Neutral rating on the stock. Our six month target price is $175.

Subscribe by RSS Subscribe by Email