Many analysts are beginning to ponder the once unthinkable: What will Apple Inc. (Nasdaq: AAPL) look like without the guiding hand of CEO Steve Jobs at the helm? The question had been asked before, but it gained additional urgency following news Jobs would be taking a leave of absence from the company to focus on his health. (See: Apple's Jobs to take Medical Leave of Absence .)
The company's shares gyrated wildly at the opening on Tuesday, January 18, swinging from $344.76 to $324.60 before clawing back most of the decline to close at $340.65. Investors, it appears, believe too much in Apple to let even the negative news of Jobs's health problems sink the stock.
Still, investors are paying closer attention to the issues that could drive valuation up or down at Apple, according to Brian Marshall, an analyst at Gleacher & Co. Marshall, who is positive on the company, identified three reasons to be bullish on Apple's stock price and three factors those who are negative (bears) might be considering. Here they are starting with the bulls:
Three Reasons to be Bullish on Apple
- iPhone ramp is in early innings: With the iPhone now available in about 90 countries (compared to 80-plus in June 2009 and 6 in June 2008), the global ramp has just begun and Apple now has 165 international carrier partners (Research in Motion has nearly 600 carriers).
Best technology company: Apple continues to gain share across its major product lines. Its business model is becoming stronger over time as well [and] the company benefits from an increasing richness of its revenue mix and when average selling price (ASP) cuts come, customers typically migrate up the "SKU stack" and buy higher priced items with higher associated gross margins.
The Bank of Apple: Apple continues to generate tremendous amounts of cash flow from operations and its current net cash hoard (i.e., total cash minus total debt) now stands at $51 billion (or $55 per share) -- the single largest in the technology industry by far.
Three Reasons to be Bearish on Apple
- Margins have peaked: Apple’s gross margin reached 41.8 percent in September 2009 and based on management's guidance, gross margins are expected to decline significantly to approximately 36 percent in December 2010. This trend should continue as pricing pressure will intensify going forward as the company aims to maintain its market share in a competitive environment. ASPs will simply decrease faster than cost of goods sold, thus negatively impacting the gross margin.
- iPad will cannibalize the Mac/iPhone family: The iPad has successfully integrated the functionality of a slimmed down notebook into a media player form factor and has effectively rendered a significant portion of the Mac (and potentially the iPhone) product family obsolete. This presents a serious problem as iPhones and Macs generated 65 percent of Apple’s total revenue in 2009.
- Stratospheric carrier subsidies unsustainable: It is estimated that Apple receives approximately $450 from AT&T Wireless on the activation of an iPhone as part of a carrier subsidy program. It is also estimated that Apple receives an average subsidy of approximately $300 from its international carrier partners as well. These subsidies are well above average of what other vendors (even RIMM) collect. After the introduction buzz of the iPhone has worn off and the subsidy agreements expire, the wholesale ASP of the iPhone will likely take a significant step down.