Hurt by worries about the health of Chief Executive Steve Jobs, and the economic recession, Apple shares have lost more than half their value over the last eight months and are now trading at around $82 — similar to levels before the launch of the company’s trend-setting touch-screen phone.
Does the absence of Jobs, who is taking medical leave until the end of June, warrant such a sell-off for the maker of the iPhone, iPod music player and Mac computer?
Or can Chief Operating Officer Tim Cook, who will mind the shop in Jobs absence, make sure Apple continues to deliver innovative products to lure consumers even in a tough economy?
A COMPELLING BUY
Apple bulls say the stock’s valuation is too attractive to ignore, and that concerns about Jobs have already been factored in. They expect Apple to shift gears and push out some low-end products, to open up new markets in a weak economy.
“The fact of the matter is that Apple has become an institution, a culture, that transcends more than one individual,” said Kaufman Brothers analyst Shaw Wu. “We think the stock is pretty attractive here. A lot of bad news is priced in. It’s trading at 10 times 2009 free cash flow. If you factor in their cash, which is $27 a share, or $25 billion, the stock is trading at only 6.5 times. That’s very attractive.”
“It’s actually fairly inexpensive compared to its competition: IBM (IBM.N) and HP (HPQ.N) trade at about at 9 times. Microsoft (MSFT.O) is trading at about 10 times. I think Intel (INTC.O) is at 13 to 14 times, and Cisco (CSCO.O) is up there as well. If you look at Apple’s growth prospects compared to a lot of these other companies, it’s arguably the most promising.”
“The fundamentals haven’t really changed. Apple still has big competitive advantages,” Wu said. “We think a lot of the innovation, a lot of his style, his thinking, a lot of that has been ingrained into the company’s DNA.”
Even if Jobs leaves for good, analysts say the next six months will be a good test for Cook and allows Apple to put a succession plan into place.
Pacific Crest Securities analysts Andy Hargreaves said he would be buying Apple shares, noting that the company is trading at 3 times cash and 11 times forward earnings.
“You’re getting a company that is a leader in smartphones, that has been gaining share in the PC market and probably continues to do so. It’s dominant in digital media and has a very talented management team regardless of whether Steve Jobs is there or not.”
ThinkPanmure analyst Vijay Rakesh agrees. “We think it’s a buy. You haven’t seen a valuation on Apple as low as this probably since July or August of ’06. It’s basically being impacted by near term consumer (weakness).”
Rakesh thinks investors are sitting on the sidelines right now but will move back into the stock after Apple reports results on January 21. “Even in the worst case that he does not come back…it does not imperil the innovation,” Rakesh said.
TOO RISKY FOR NOW
Apple bears say Jobs’ leave of absence raises near-term uncertainty as he is the company’s chief innovator, deal-maker and a leader deeply involved in minute product decisions. His being sidelined for at least six months raises the risk of Apple being unable to sustain its record of innovation.
Beyond Jobs, some are also worried about how well Apple’s high-end products will sell in a deteriorating economy.
“You’re not going to miss a quarter because Steve Jobs is taking a break. My bigger concern is end demand in the weakening economic environment, given the fact that they play more in the high end of the market,” said UBS analyst Maynard Umm, who has a neutral rating on Apple and $110 price target.
“I think expectations are already pretty low for the outlook so the real question is what’s the catalyst to drive revenue and earnings again. It’s unclear what the catalyst is given this weak environment.”
Umm said it would be easier to make a bet when it becomes clearer how much the economy will hurt Apple’s profits: “From my point of view, it’s more of a wait and see. You have to see earnings numbers get reset for the rest of the year.”
Calyon Securities analyst Shebly Seyrafi said the next few months will be very challenging for Apple.
“The stock could be choppy for the next few months,” he said. “Q1 is going to be challenging for most tech companies. Even (Apple’s) results may not be very impressive in the near term.”
However, Seyrafi likes Apple for a 12-month horizon, assuming that that economy begins to improve in 2010, and he has an “outperform” rating on the stock with a $95 target.
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