Dear Bottarelli Research Reader,
I’ve been searching far and wide to figure out what’s soured traders on a certain famous tech stock this week. It really is a slow news week. The Fed won’t meet again for two months, and Congress is on summer break…
Greece has receded to the back burner. There’s talk of another bailout some two weeks out, but that’s pretty much the norm now. And somehow, Europe is muddling through the whole Greek crisis. It’s almost as if Greece was only a tiny little corner of Europe. Oh wait, it is.
Russia hasn’t invaded anyone lately, and there is a deal working through the pipeline with Iran.
Several presidential candidates have pledged to scotch that deal, but no one is sure how to do it.
China is still slowing down, and you may have read this week that Beijing is trying to make it harder for short-sellers.
But this isn’t news — we warned you back in July that China was threatening to nationalize “profiteers” who might try to get their money out of China.
But “slowing” doesn’t mean quite the same thing in China as it does everywhere else. For example, depressed energy prices just pushed Canada into recession. But Chinese GDP is still advancing at a 7% clip. Even if they’re stretching the truth a bit, they are still outstripping most Western countries by an order of magnitude.
Speaking of depressed oil, Brent crude is back to where it was at the beginning of the year, as traders anticipate Iranian oil coming back onto the the global market.
Seriously, this week’s biggest news was when Boston ceded the 2022 Olympics to Beijing because the Mayor felt that hosting these events is just too damned expensive. But that can’t be why a perfectly good stock — in fact, a great stock — that just reported fabulous quarterly numbers lost about -14% in the past 10 trading days.
Maybe summer boredom really does account for it all.
Let’s say you’re the boss of a major news outlet. You can devote column inches or minutes of your anchor’s time to the “Apple Crisis” or you can yap about the presidential debates, complete with some 20 or 25 candidates between the two parties. Honestly, you’re going to pick “Apple crashing” every time.
We’ve debunked the Apple crash at such great length that it almost seems a waste to go through it again. But that does seem to be the story of the day, so as soon as we review this week’s “weather report” I’ll offer you 16 fresh reasons why you should buy AAPL here. It won’t take anywhere near as long as it sounds to get through the list. And then, I’ll show you two more deals on the tech list, as long as we’re at it.
The Current Situation
Price: Probable downside is 1.42 times probable upside. Weak Sell.
Volume: We are two days into one red, negative-volume week. Over the past 18 months, we’ve seen 23 negative volume cycles. 17 (74%) reverted to positive by the following week, while six (26%) ran to two, three, and four weeks. Buy.
Moving Average Convergence/Divergence (MACD): This is a unique situation. We are now 11 weeks past a downside cross without a reversion and a fresh signal. No signal.
Accumulation/Distribution (A/D): Over the past 18 months, we saw one previous double bounce like this. Buy.
Summary: Wow, 25 weeks of deadlocked range-running. That’s just…well, it’s certainly something. For now, I’ll call this a weak sell. Frankly, my biggest fear right now is that we could be stuck in this range through the 2016 elections!
Actually, that’s not really true at all. A far bigger threat is that without any upside, bored media-kings could go looking for a fresh crisis to yell about. These guys love a bull market because it brings in viewers. And they will take a bear market — for a while, anyway — because it still sells ads.
But this flat market stuff is killing them. No wonder they’re making trouble for Apple.
The Telling Details
We’ve already covered at great length how Apple has beaten estimates handily, and is bringing in huge growth in every category that matters. So here are those 16 fresh reasons to buy AAPL right now. It’s a list of the analysts who are still bullish on AAPL after all this “sturm und drang” along with a few comments echoing our own strong buy recommendation…
1. Cantor: Buy; Price Target: $195
In our view, Apple is still in the midst of a transformational, super cycle with the first new product category in five years with Apple Watch, a multi-year iPhone cycle given the larger form factor, big momentum in China, potential new areas of innovation (e.g., streaming TV, growing interest in the car), and a rapidly expanding digital matrix (e.g., Apple Music, Apple Pay, CarPlay, etc.).
2. FBR: Outperform; Price Target: $175
As Apple has become the “gold standard” of technology, it is held to a higher standard; thus, investors will be disappointed this morning by a good, but not great, iPhone shipment number (47.5 million versus whisper expectations at 49 million) during the June quarter, coupled with a conservative September forecast. While China impressively grew 100%+ and remains the main fuel in the company’s engine, now Apple becomes a bit of a “prove me” stock, as the Street needs to feel comfortable that the iPhone 6/6 Plus growth story is alive and well.
3. Piper Jaffray: Overweight; Price Target: $172
We are buyers on the 6% aftermarket pullback on shares of AAPL based on the belief that Apple will continue to gain share in the high-end smartphone market and margins will expand into the S cycle resulting in Street numbers inching higher over the next several quarters. While some investors will view the 48.1 million iPhones (ex channel drain) as a disappointment below investor thinking for more than 49 million units, the reported unit sales represent significant market share gains. For the Watch, we estimate Apple sold around 2.5 million units, which was in-line with investor expectations.
4. Goldman Sachs: Buy; Price Target: $163
Given the revenue, iPhone unit and EPS upside seen in the past two quarters, investors were likely looking for sharper upside. With that said, we viewed this as a solid performance for the tail end of the iPhone 6 cycle, and investor attention is likely to quickly shift toward the iPhone 6s refresh later this quarter. While the next iPhone family faces a tough set of comps, we continue to believe there is upside to expectations — particularly on gross margins.
5. Morgan Stanley: Overweight; Price Target: $155
With demand strong despite these price increases in many regions, we see a path for channel inventory build in 2H15 that further supports our view that iPhone units can grow Y/Y. We like the set-up created by 1) lowered expectations, 2) lower than target channel inventory, 3) 73% of the installed base yet to upgrade to larger screen iPhones, which we believe can drive iPhone unit growth in FY16, and 4) continued strong international demand data points.
6. Oppenheimer: Outperform; Price Target: $155
We believe Apple’s ecosystem appeal is only beginning to be understood by its customers and its growing portfolio of best-in-class services and peripheral devices will help the brand to sustain long-term share gain across hardware product categories.
7. Canaccord: Buy; Price Target: $155
With only 27% of the iPhone installed base having upgraded to the iPhone 6/6 Plus devices by Q3/1F’15, we anticipate continued strong replacement sales through 2015. Further, consistent with management commentary, we anticipate continued high-end smartphone market share gains for the larger screen iPhone 6 devices as our surveys indicate a greater mix of Android smartphone consumers are switching to the iPhone 6 smartphones than during iPhone 5 series launches. We believe these trends should grow the iPhone installed base to over 500M exiting C2015, and this base should drive strong future iPhone replacement sales, earnings, as well as cash flow generation to fund strong long-term capital returns programs.
8. Baird: Outperform; Price Target: $155
With a new iPhone around the corner, the seasonally stronger quarters ahead and a possible Apple TV update, coupled with valuation, we would be buyers on weakness.
9. Susquehanna: Positive; Price Target: $155
We think Apple Watch expectations had also gotten too high, further contributing to the variance vs. expectations. But we don’t think this report at all suggests a problem with Apple or iPhone. Our 2H iPhone and our C16 EPS estimates remain unchanged after the report.
10. RBC: Outperform; Price Target: $150
We think there were several data-points that should give investors confidence: 1) 27% of install base has migrated to iPhone 6/6+, leaving plenty to ensure 6s is successful and sustains revenue growth, 2) Gross-margin guide of down 70bps is minimal given program transition and f/x challenges and lays the ground for 40%+ gross-margin in FY16, 3) Only 12% of China has 4G coverage, as that expands it provides room for iPhone expansion in China and 4) iPhone ASP remain strong at $660 (flat q/q) showing a move towards 6+/higher memory.
11. Stifel: Buy; Price Target: $150
We believe there are several positives: 1.) iPhone blended ASP ($/unit) at $660 vs. our $645 estimate&hellip 2.) Greater China – revenue +112% yr/yr… 3.) Apple reported that ~27% of the iPhone installed base represents consumers having upgraded to iPhone 6/6+; company also seeing the highest Android-to-iPhone switching rate ever (highlighted in comScore data). 4.) FCF totaled $12.945B ($2.24/sh.), or +64% yr/yr…
12. Citi: Buy; Price Target: $145
iPhone units of 47.53 mln (+35% y/y) above street at 47 mln (but below whisper number of 50m+ units) with Average Selling Price at $660 above consensus at $634, underscoring our belief that purchases are at higher price point thereby driving gross margin higher.
13. Credit Suisse: Outperform; Price Target: $145
Given high retention rates, a superior ecosystem, and multi-product compute advantage, we believe such elevated level of earnings and [free cash flow] of around $64 billion per annum should be sustainable long-term.
14. Bank of America Merrill Lynch: Buy; Price Target: $142
CEO Cook noted that the quarter saw the highest percentage of Android switchers to iOS, which we view as bullish given the relative share opportunity. We believe the weakness presents a particularly attractive opportunity as we expect estimates to move higher post the negative revisions following this quarter, particularly for 2016, where our installed base work still suggests upside potential.
15. Macquarie: Outperform; Price Target: $140
Our main concern is that we are one more quarter closer to the December iPhone 6 comp. We continue to believe that the pent-up demand for the larger screen size for the iPhone 6 will significantly impact this year’s holiday growth.
16. William Blair: Outperform
Bottom line, we recommend investors use any pullback in the stock as a buying opportunity. With a weak competitive landscape at the high-end smartphone market (and Samsung struggling), combined with continued desire to seek higher-end capable smartphones (even in emerging markets), we believe Apple will continue to strengthen its competitive position.
How to Play It
Catch that “bottom line” from William Blair? These guys have read all the data out there, including Canalysis’ odd “Apple is losing market share in China” report. And they are standing pat and buying more.
You should take the hint, too. But if you want something else to focus on — and who doesn’t after all this wall-to-wall, 24/7 Apple coverage — then take a quick look at the charts for International Business Machine IBM – NYSE and Cisco Systems CSCO – NASDAQ.
IBM got out of the overcrowded PC business years ago. Now it focuses on mainframes and IT services. AAPL’s downdraft has sucked IBM down to the bottom edge of its bottom quartile. Over the past 30 months, the typical rebound from this position comes in at 9.76% over 4.36 weeks. If IBM repeats that performance again, it would rise to $172.18 by mid-September.
This is not some kind of wild-eyed bullish scenario. IBM has beaten that price twice in the past 13 weeks. But if you want an even-more conservative target, try for the 50-day (10-week) average at $165.09.
Looking to Cisco Systems CSCO – NASDAQ, we see a solid tech company — still the backbone of the Internet — muddling around at the bottom quartile of a nice rising trend. CSCO’s typical rebound from this position comes in at a chunky 27.35% over 15.75 weeks. If CSCO repeats this performance again, it would reach $34.04 by the beginning of December. Once again, if you don’t feel like marrying a company in a market offering very few new highs, you could easily aim for the resistance node at $29.39.
By the way, we are not the only outfit that sees hidden value in CSCO. Oppenheimer’s Ittai Kidron, Michael Leonard, and George Iwanyc just reiterated their “Outperform” rating and $32.00 price target on the stock, assuring they “expect a strong finish to the year.”
Now comes the quibbling and caveats. Please keep in mind that I have been somewhat bearish for most of 2015. I do think this is an overbought market that’s having a very hard time finding additional value.
That said, I can name a hundred companies that ought to to be tumbling right now. And these three are simply not on that list. If the economy does not fail, and we do not sink into a recession (like Canada), then these three are probably some of the best 21st century “pick and shovel” stocks you could hope to find. And the opportunity to buy them on the cheap is just too good to pass up.
As always, the charts tell all.
Sincerely,
Adam Lass
Editor, Bottarelli Research Newsletter
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Source: Bottarelli Research