Apple: ‘Bent, not broken’

Apple Q1 2013 Earnings Analysis

Apple (AAPL) shares were absolutely crushed in after-hours trading on Wednesday following the company’s fiscal first-quarter earnings report. Apple’s holiday quarter was the most profitable ever reported by a technology company, but its guidance for the March quarter confirmed much of what industry watchers had feared as they sent Apple stock down 30% over the past three months: Apple’s growth is slowing and margins are being compressed. Of course no company can keep up the breakneck pace at which Apple had been growing over the past few years, but this is hardly the beginning of the end — according to one industry watcher, Apple is “bent, not broken.”

RBC Capital Markets analyst Amit Daryanani on Thursday offered a level-headed take on Apple’s results, highlighting several valid points on both sides of the Apple argument.

“AAPL reported modest upside to Dec-qtr expectations and guided March-qtr below street expectations,” Daryanani wrote. “There was enough in the print for both bulls and bears. As the bulls will point to 1) Strong ramp of iPhones and iPads 2) 260bps upside to gross-margins, 3) Conservative March-qtr guide and 4)Multiple upcoming catalyst (new products, capital allocation, potential china mobile). The bears will focus on 1) Cannibalization will hurt revenues and margins, 2) Change in commentary around guide, 3) Lack of new innovative products.”

He continued, “We view the results as a sign that AAPL is executing well as they shift to a more normal growth company. We see levers for further gross-margin tailwinds driven by easing transitory costs, supply chain leverage, OPEX controls and new products.”

Daryanni acknowledged that Apple’s momentum is slowing, of course, and he lowered his price target on Apple shares to $600 from an earlier target of $725 as a result.

“We believe the debates surrounding Apple’s long-term financial model should ramp up as bears point to a possible sub 38% long-term gross margin profile due to iPad cannibalization and iPhone sales slow down,” the analyst noted. “In our view, while the guidance was softer than expected the eco-system remains and Apple has maintains a strong product portfolio that should continue growing revenue at double digits on a y/y basis. Future revenue catalysts could include an iTV or the addition of China Mobile.”

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