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Icahn Continues To Buy Stocks as Apple Looks to the iPhone 6, iWatch To Increase Sales

Jan 28 2014, 6:00pm CST | by

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 Icahn Continues To Buy Stocks as Apple Looks to the iPhone 6, iWatch To Increas
 
 

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Icahn Continues To Buy Stocks as Apple Looks to the iPhone 6, iWatch To Increase Sales

What’s next?

That’s the question now on the minds of Apple watchers after the company delivered disappointing holiday sales of the iPhone and announced a revenue forecast for this quarter that wasn’t as great as investors and analysts hoped.

While CEO Tim Cook didn’t get into any details about what new products might be on the horizon for Apple, he did assure analysts yesterday that new products, in new categories are coming this year.

“Yes. Absolutely,” Cook said yesterday when asked if Apple was still on track to move into new product categories in 2014. “Innovation is deeply embedded in everybody here, and there’s still so much of the world that is full of very complex products, etc. We have zero issue coming up with things we want to do that we think we can disrupt in a major way. The challenge is always to focus to the very few that deserve all of our energy. And we’ve always done that, and we’re continuing to do that.”

That’s good news given that the shares fell as much as 8.8 percent today, the most in a year, after Apple reported a jump in revenue and profit, quarterly records for iPhone and iPad sales, and one of the best sales quarter for its Macintosh computer line in company history. The shares are down 7.6 percent, or $41.55,  to $508.95 at 2:46 p.m. New York time in Nasdaq trading.

The problem: Reception to the iPhone 5s and iPhone 5c doesn’t seem to be driving the sales growth investors are looking for from Apple. Even though Apple sold a record 51 million iPhones in the quarter ended in December, analysts were looking for 55 million. Their optimism was based on Apple offering two new models of the iPhone — the high-end 5s, with an all new fingerprint scanner and the plastic, colorful iPhone 5c — and distributing its smartphone through new wireless partners such as NTT Docomo in Japan.

As for the sales forecast in the quarter ending in March, Apple’s guidance was below analysts expectations and calls for a 25 percent quarterly decline in sales. That’s worrying given that Apple will count iPhone sales from China Mobile, the world’s largest mobile carrier, for the first time this quarter.

Apple said it faced a $2 billion “headwind” in March quarter sales in part because it was able to meet supply in the December quarter (so no pent up demand for iPhones this quarter) and in part because it is coping with a dying iPod business.

Not everyone is disappointed with the shares dip. Billionaire investor Carl Ichan, who started buying Apple shares in August and has been steadily adding to his holdings ever since, went on another buying spree today. In a tweet, Icahn, who has been pressing for Apple to give back more of its cash to investors in the form of dividends and buybacks, said he bought an additional $500 million in shares. That brings his total holdings in the Cupertino, California company close to $4 billion.

“The long-term picture is completely unchanged,” Icahn told CNBC today, saying that he has made a lot of money over the years buying on dips in a company’s stock and believes that the company will enter new product categories this year. “To me, it’s even more compelling for Apple to buy back stock now.”

Still, the takeaway is that the iPhone 5s and 5c may not be compelling enough updates to lure smartphone buyers away from lower-priced and feature-rich smartphones from rivals such as Samsung. And with the iPhone at more than half of sales, analysts are questioning whether “Apple is really still a growth company,” said Ben Reitzes, an analyst with Barclays.

                                                             iPhone 6 In June?

The answer to that question depends on what new products and what new categories Apple will deliver. There is already a groundswell of rumors around the iPhone 6, a faster, thinner new model that Apple may offer in two screen sizes to lure buyers who like the larger displays on Samsung Galaxy devices. The speculation is that Apple will, as it has for the past few years, release the new smartphone in the fall. But smartphone competition might convince the company to move up the ship date to June or early summer.

There’s also speculation that 2014 will be the year of the iWatch, a smart watch that would mark Apple’s entry into the wearables market, a new mobile payments system that takes advantage of the millions of users who have iTunes accounts, and an interactive TV.

Apple may also create a larger screen iPad that blurs the line between a notebook and tablet, and a lower-priced iPhone that sells for less than $300 without a contract (in contrast to the iPhone 5c, which sells above that price). That low-cost iPhone and “converged device” could contribute the most upside to Apple’s sales, said Toni Sacconaghi of Sanford C. Bernstein. “The imperative for new product categories – which CEO Tim Cook stridently reaffirmed would occur “this year” – is at an all time high.”

Steve Milunovich of UBS says Apple followers should “have a little faith.”

“Cook said Apple has plenty of disruptive ideas but needs to concentrate resources on the best opportunities,” Milunovich said. “This approach has worked historically and fits with our belief in focus—we are willing to give Apple the benefit of the doubt.”

Here’s what else financial analysts are saying — and predicting — for Apple this year.

Barclays Capital, analyst Ben Reitzes. “The iPhone unit momentum and guidance are negative surprises, but the cash flow and new product potential could be appreciated more over the longterm. We believe shares are likely to find support in the very low $500s at this point to factor in weak March and June quarters – with the potential to move higher later in the year if Apple could add to its pace of capital returns and as anticipation builds around new products in the fall. Hopefully Apple’s plans include 2 new and larger iPhones, a new larger iPad, a new Apple TV, more solutions/partners for payments and a wearable device.”

Cantor Fitzgerald, analyst Brian White. “Last night, Apple reported a strong EPS beat and upside in iPad unit sales but disappointing iPhone trends and a soft second-quarter, fiscal 2014 outlook. In our view, it was more clear than ever that Apple needs to introduce a new product category to return to healthier growth trends, a step that we have previously forecasted to happen in 2014, and this was further supported by comments from Tim Cook during last night’s earnings call… Given another soft outlook from Apple, the generation of $22.7 billion in operating cash flow and trading at an unassuming 8.2x (ex-cash) our calendar year 2015 EPS estimate (and even lower given the after-market trading in the shares), we believe Carl Icahn’s push for a more aggressive share repurchase program could resonate with shareholders, and we expect his voice to become even louder in the coming weeks.”

Cowen and Co., analyst Timothy Acuri. “We would be buyers of every share possible at such levels as such a correction in a stock of this size/quality does not come along often. At a high-level, the focus on iPhone market share (where Apple lost ~200bps of high-end (>$300 average selling price) share; about 400bps of overall share in ’13) should evolve significantly as a 64-bit 4.8″ iPhone 6 (still 50/50 for June launch) shores up high-end share while Apple’s first true purpose-built lower-cost phone attacks the highest growth part of the market maybe in the first half of 2015. In tablets, 13-inch remains targeted for the calendar third quarter, further blurring the notebook/tablet lines and pivoting the market once again. Lastly, wearables and payments are hard to quantify, but its R&D efforts in real-time health monitoring suggest meaningful unit potential, adding more angles for innovation.”

Piper Jaffray, analyst Gene Munster. “We would be buyers on the pullback based on our belief that despite the disappointing Dec 2013 report, particularly on iPhone, the concept of owning Apple into the fall for the iPhone 6/new product cycle that is widely expected remains… The three[new] leading product categories include the watch, TV and mobile payments. We believe the TV could add up to 8% to revenue in the first year of selling (if Apple gained about 4% of the global TV market implies 10m units at $1,500 per unit). Separately, based on our fall of 2013 Piper Jaffray survey of 799 US consumers, we believe that Apple could sell 5-10 million iWatches in the first year of its availability. We believe that a 5-10 million unit sales tally for the first year would mean about 2-4% penetration of a rough iPhone user base projection of ~293 million units (combined sales in 2012/2013). We do not view the watch as a likely needle-mover for Apple in terms of revenue in 2014, but expect investor optimism around the category to be positive for shares of Apple.”

RBC Capital Markets, analyst Amit Daryanani. “While Apple reported revenue and earnings per share modestly above expectations we note that investors are becoming concerned with regard to 1) iPhone unit growth and 2) lack of product innovation…We think the stock will remain range bound near-term ($500-550), though we do se upside catalysts on the name including – i. Capital allocation, ii. Steady but positive China Mobile ramp, iii. New product cycle (iPhone 6 and iPad 4) and iv. Potential new revenue streams (payments, wearables, TV).”

Robert W. Baird & Co., analyst William V. Power. “We would use weakness [in the stock] to accumulate positions in front of iPhone 6 and new category rumors.

Sanford C. Bernstein & Co, analyst Toni Sacconaghi. “Apple’s iPhone unit shortfall was surprising because the company enjoyed several year-over-year tailwinds in the quarter: in fact, our analysis suggests that on comparable apples-to-apples basis, iPhones declined low single digits in the quarter– a worrisome datapoint in a market where overall smartphone units have grown over about 35% for the previous 4 quarters). The sluggishness – coupled with weak unit volumes from Samsung – points to an increasingly saturated high end of the smartphone market…With no evidence of a lower price iPhone forthcoming, and the opportunity for carrier additions limited, we worry about Apple’s ability to grow its iPhone business going forward, which is clearly discomforting. While many investors believe that larger screen offerings will help, we note that (1) repurchase intentions for both Android and Apple devices are very strong, potentially limiting the opportunity for switching; and (2) a larger screen device will likely be more expensive for Apple to make, impacting margins. Clearly, the imperative for new product categories – which CEO Tim Cook stridently reaffirmed would occur “this year” – is at an all time high; we believe that a larger screen iPad/”converged device” could potentially be most material for Apple.”

UBS, analyst Steven Milunovich. “CEO Tim Cook did say that a new product category would be introduced this year. Spending supports more offerings—R&D almost doubled the last two years and F2Q expenses should be unseasonably strong at flat sequentially. Investors are getting antsy. Apple mentioned iBeacon and potential in payments; wearables are expected though timing is uncertainty. Cook said Apple has plenty of disruptive ideas but needs to concentrate resources on the best opportunities. This approach has worked historically and fits with our belief in focus—we are willing to give Apple the benefit of the doubt…We maintain our Buy with new products likely to be a second-half catalyst. Potential iPhone maturity is a legitimate concern, but growth should improve as China Mobile ramps and new products are introduced. Moreover, we believe the stock is not expensive and Apple has the backstop of additional share repurchases.”

Also on Forbes:

The Evolution Of Apple's Mac Over The Past 30 Years

Source: Forbes

 

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