Analysts wonder what could upset the Apple cart

Date: Tuesday 24 Apr 2012

Apple is gearing up to report earnings after the US close on Tuesday night and analysts are watching for sales weakness in the Mac line of personal computers while worries surge over chip availability for the iPhone 5.

Worries aside and despite the recent pull back, several analysts see the stock topping one thousand dollars, almost double Monday’s closing price.

As far as analyst expectations go, Wall Street is looking for fiscal second quarter sales of $36.7bn with earnings coming in at $10.02 a share. The company will probably issue guidance on the third quarter outlook but analysts have learnt to take these with a pinch of salt. Consensus shows fiscal third quarter expectations of revenue at $37.34bn and EPS at $9.91.

Unit forecasts

With the variety of Apple products, the devil’s in the details. Sales of the iPhone will be centre stage with analysts factoring in growth in China and estimates running from 30m to 33m units sold in the last quarter.

An increase in sales of the iPad tablet device is also expected with estimates hovering close to 12.5m units.

The Mac, Apple's line of desktop and laptop computers, has been losing ground with analysts reducing forecasts ever since the market research firm NPD projected a 16% drop in sales during March. The general forecast is for just 4.3m units sold, partially because iPads are expected to have taken a bite out of the numbers. Yet some experts feel the downturn is just a temporary factor: “The deceleration in Mac units is likely to rebound quickly in our view, however, as Apple refreshes both desktops and notebooks over the next several months,” says Goldman Sachs.

The new Chief Executive Officer Tim Cook is not expected to comment on the release of the new iPhone 5, because the Apple hype-machine, largely operated by a slavishly compliant media, has not yet been cranked up to 11 . Analysts generally expect the launch date will be September or October of this year. Worries last week were raised as mobile technology firm Qualcomm commented that it was seeing a squeeze in the supply of chips that are generally used in the iPhone. Some analysts shrug off the jitters since Apple has market clout and should be able to use it to get the chips it needs.

Fundamental analysis

Despite having risen more than 40% since the beginning of the year - closing on Monday at $571.70 - and long since having blown past rival Microsoft’s market cap, fundamental analysts are still convinced that Apple has upside potential. The group of analysts expecting the company's share price to top $1,000 is is swelling.

Of course, such outlandish expectations are often left without a date to accompany them, even though brokers argue for support from Apple's winning line of global mobile devices, growth in China, the aforementioned iPhone 5 launch and, let’s not forget, the Apple television. The most “outrageous” price target comes conveniently without a time frame. Henderson Global Investors called the shares “extremely undervalued” and threw out a $1,200 price tag earlier this month.

A more cautious Piper Jaffray does expect the company to reach $1,000 but keeps a “shorter-term” price target at $910.

Goldman Sachs still has a buy on the shares having said the stock is still its “top pick” and raised its price target to a “much more conservative” $750 from the prior $700.

Technical analysis

After a recent 10% drop from record highs ($644), we asked our technical analysts here at Digital Look to take a look at the chart. They insist that the “the recent profit-taking doesn’t set off any alarms. Apple still shows the same upward tendency that has been present for several years.”

Our experts place the first support level down at $542.80. If this level doesn’t hold, a larger correction could occur down to the following support at $486.

In this context, they insist that these are the types of corrections that give us an opportunity to take up positions and let us know that they’ll be keeping an eye on Apple.

Specifically, they tell us they’re watching the first resistance at $620 because “a break above this level would be the sign of strength that corroborates current buying strength and a high probability that the stock continues its upward drive”.

An alternative view

Meanwhile, Colin Cieszynski, a market commentator for spread betting firm CMC Markets and former contributor to this site, notes that "fundamental and technical indicators have been sending conflicting signals about whether Apple is in a bubble."

Cieszynski observes that from November 25th through April 9th, Apple shares gained 74.9%. Over the same time frame, the Dow Jones Industrial Average went up 15.1%.

"The company also has blasted through the high end of a channel and the chart has gone parabolic or nearly vertical. Technically this suggests that Apple is probably in a bubble and vulnerable. In contrast, fundamental indicators suggest that the stock could still have room to run for a while,” the CMC Markets man said.

Among the fundamental indicators supporting the stock's valuation, according to Cieszynski, are: the fact that Apple's weighting on the NASDAQ 100 index is still below the 20% level (at 19%) it reached in late 2010; Apple's current price/earnings (P/E) ratio at less than 18 is still low relative to levels it reached in the last decade.

According to Cieszynski, alarm bells could be triggered were Apple's NASDAQ 100 rating to rise into the 25-30% range in the coming months, while he also argues that a P/E ratio of nearly 18 is smal beer for a growth company.

As for Tuesday's results, "while a positive result could send the shares substantially higher over time, a miss could accelerate the correction that already appears to be underway. A return to Apple’s longer-term trend could take the shares back toward the $400-500 range pretty easily. Based on current trading, whether Apple next move either above $620 or below $580 could give a strong indication of whether the bulls or bears prevail for the moment,” the CMC Markets chart-gazer reckons.

JM

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