January 16, 2013
Attractive Risk:Reward into
Strong US demand should translate to iPhone/iPad
upside and higher than expected gross margin.
C1Q13 seasonality concerns are overblown and
several catalysts exist through the remainder of
2013, in our view. We see 6:1 upside to our base
case of $714 vs. downside to our bear case of $450.
We expect Apple to beat C4Q12 consensus revenue
and earnings estimate of $54.6B and $13.35. We
believe iPhone shipments drove the upside, as in-cell
display and labor constraints eased and iPhone 5 supply
improved through the quarter. Recent data from US
carriers and our holiday survey suggest demand was
stronger than expected. We also see modest upside to
our 20M iPad unit forecast (cons. 22M) on the back of
iPad mini strength.
Strong iPhone sales could drive gross margin
upside. We model like-for-like gross margin declines
across Apple’s product lines due to higher costs early in
product cycles. That said, mix could provide an
offsetting tailwind, with every 1M iPhone unit upside
adding 10-15 bps to gross margin, all else equal.
C1Q13 iPhone shipment concerns are overblown, in
our view. As constraints eased, iPhone suppliers built
about 13M more units than we model in 2H12. If we add
this inventory to the March build plans, we believe Apple
can ship 40-45M iPhones in C1Q vs. current market
expectations of 35M-40M. So, while it’s reasonable to
expect conservative guidance given recent behavior, we
believe our current estimates are ultimately achievable.
List of potential catalysts growing: 1) iPhone launch
in summer 2013 which could include a lower priced
version, similar to iPad Mini, 2) new iPads, including
iPad Mini with Retina Display around mid-year, 3)
expanded carrier partnerships with T-Mobile in the US,
NTT Docomo in Japan, and/or China Mobile in 2H13, 4)
increased share repurchase (at current levels, every
$5B buyback lowers share count by 1%).