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Apple Inc. Message Board

  • getintoh20 getintoh20 Apr 17, 2013 7:40 PM Flag

    AAPL: BMO Cuts Target to $460; Dominance of Mobile Profit Can’t Last

    BMO Capital‘s Keith Bachman this evening reiterates an Outperform rating on shares of Apple (AAPL), while cutting his price target to $460 from $580, after reducing his estimates for the fiscal year ending this September to reflect rising competition for the iPhone in smartphones from Samsung Electronics (005930KS).

    Apple shares today closed down $23.44, or almost 6%, at $402.80, after breaking through fresh 52-week lows throughout the day and hitting a new low of $398.11, its lowest level since December 23rd of 2011, following estimate cuts from others on the Street.

    “We think Samsung has not only caught up to Apple in the high-end of the smartphone market, but will likely outgrow Apple this year.

    Part of that is an overall shift by the market to cheaper smartphones, both on the part of consumers and on the part of carriers, writes Bachman, based on conversations he’s had with telecom operators:

    In the past few weeks, we have spoken with and met with a number of service providers around the world, as well as visited many stores in Europe, US and Canada. Our net conclusion is that high-end smartphones, such as iPhones (at high price points), is increasingly a replacement sale, particularly in developed markets. Further, we think Apple’s current product line-up is too expensive for most emerging markets. We think this will result in lower unit shipments from iPhone product cycles in the future, compared to past cycles [...] Similarly, carriers have clearly indicated that the mid-tier smartphones ($200-$400) will have very strong growth opportunities in mature markets, as carriers try to reach a broader group of consumers. Further, we believe mid-priced smartphones will also have very meaningful growth opportunities in emerging markets, such as China, India, Indonesia and Brazil.

    Bachman sees Apple releasing a less-expensive iPhone this year, sometime in the second half, and he expects that to bring down Apple’s gross margin to 38.1% versus a prior estimate for 38.4%. He models $173.82 billion in revenue this year and EPS of $41.24, down from a prior view of $180 billion and $43.44.

    As regards Samsung, it is now outselling Apple in some markets, according to his conversations:

    In the past, when we have done store visits, sales reps have generally indicated that Apple was the best-selling product. However, at this time, most sales reps and management teams we spoke with have indicated that Samsung is selling at very close levels against Apple, with the Galaxy S3 and the Note 2. Indeed, in some markets, we heard that the Galaxy S3 is outselling the iPhone 5. However, we believe Apple continues to have a more appealing brand in France. Net, Apple is no longer the clear leader, and will likely sell fewer units than Samsung in CY13, in our opinion.

    In broader terms, Bachman thinks Apple’s dominance of the profit pool in mobile — it makes over 70% of the handset industry’s profit — can’t last:

    Given that carriers are trying to lower expenses, we believe that Apple’s share of industry profits will decline over time. Moreover, we believe competition at the high-end of the smartphone market has moved closer to parity. We believe Samsung has better phones than Apple at present, though Apple has much better (and fully integrated) software. Further, many Asian brands are leveraging Android to make very compelling phones, at much lower prices than Apple or Samsung. Hence, our conclusion is that the increase in competition in smartphones will cause the carriers to lower subsidies on Apple over the longer-term. More near-term, we think the carriers will push consumers away from iPhones, where possible, even if done subtly. We pose the question at a high level – how many times in the history of any consumer goods industry has any one company dominated a market segment profit pool? We cannot think of any. Competitive innovation usually levels the distribution of profits longer-term, in our judgment.

 
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