Apple Growth Slowdown Fuels Concern of Value-Stock Shift

Jan. 24 (Bloomberg) –- Kirk Yang, head of Asia ex-Japan technology research at Barclays Plc, Eugene Munster an analyst at Piper Jaffray Cos., and Larry Haverty, a portfolio manager at Gamco Investors Inc., offer their views on Apple Inc.'s first-quarter profit reported yesterday, outlook and the company’s shares. This report also contains comments from Paul Kedrosky, senior fellow at the Kauffman foundation and a Bloomberg News contributing editor and Bloomberg Businessweek’s Sam Grobart. (Source: Bloomberg)

Apple Inc. (AAPL), after years of hyper growth, is starting to look more like a value stock, according to some analysts reacting to the iPhone maker’s financial results.

At least 20 analysts lowered their price targets after Apple on Jan. 23 reported its slowest growth rates in years and said the trend will continue. Apple fell 2.4 percent to $439.88 in New York, its lowest in a year, and ceded its position as the world’s most valuable company to Exxon Mobil Corp. Apple, down 37 percent from a Sept. 21 high, now has a market value of $413.1 billion, compared with Exxon’s $418.2 billion.

Apple had defied Wall Street projections for years, ignited by the popularity of the iPod, iPhone and iPad tablet. Now, the company is entering a phase where it may more closely resemble a value stock, said Abhey Lamba, an analyst at Mizuho Securities USA -- looking more like AT&T Inc. and International Business Machines Corp. in offering investors slower sales growth, predictable earnings and a steady dividend.

“This is a big shift in the company’s position from a year ago,” Lamba said. “The growth has slowed down much faster than we anticipated.”

Avi Silver, an analyst at Credit Agricole Securities USA Inc., and Mark Moskowitz, an analyst at JPMorgan Chase & Co., joined Lamba in saying Cupertino, California-based Apple may attract value investors after this week’s earnings report.

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Shoppers stand in line outside an Apple Inc. store in Chicago. Close

Shoppers stand in line outside an Apple Inc. store in Chicago.

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Photographer: Daniel Acker/Bloomberg

Shoppers stand in line outside an Apple Inc. store in Chicago.

Rising Challenges

The fiscal first-quarter results underscored the challenges investors see for Apple. Competition is stiffening from Samsung, Google Inc. (GOOG) and Amazon.com Inc. The iPhone, Apple’s biggest source of revenue and profit, is in a smartphone market that is becoming increasingly saturated, while popular new devices such as the iPad mini have a narrower profit margin than other Apple products. Meanwhile, manufacturing snags have held up shipments of the iPhone, iPad and Mac personal computers.

The company also is operating under a new management structure installed by Chief Executive Officer Tim Cook in October, when he ousted longtime mobile software head Scott Forstall.

Last year, Cook reinstated the company’s dividend, offering a payout for the first time since 1995. Apple’s indicated dividend yield has climbed to 2.4 percent as the stock has fallen, according to data compiled by Bloomberg. That compares with 1.7 percent for IBM and 5.3 percent for AT&T.

New Forecasts

Apple also signaled the slowing growth will continue when it announced a new format for sharing its financial outlook -- one that it indicated will be more reliable. The company in the past has given conservative forecasts that have been ignored by investors and analysts, who instead used the guidance as a starting point to create rosier projections.

Photographer: Philip Toscano/Press Association via AP Images

The Apple store in Regents Street, London on Jan. 23, 2013. Apple had defied Wall Street projections for years, ignited by the popularity of the iPod, iPhone and iPad tablet. Close

The Apple store in Regents Street, London on Jan. 23, 2013. Apple had defied Wall... Read More

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Photographer: Philip Toscano/Press Association via AP Images

The Apple store in Regents Street, London on Jan. 23, 2013. Apple had defied Wall Street projections for years, ignited by the popularity of the iPod, iPhone and iPad tablet.

Apple said second-quarter sales will be $41 billion to $43 billion, which would be the slowest rate of growth since 2009. The figures Apple provided also indicate profit may fall about 17 percent, the first drop since 2003, said Walt Piecyk, an analyst at BTIG LLC in New York.

“Maybe this isn’t sandbagging and is just the reality that they aren’t going to grow earnings,” Piecyk said.

To truly become a value stock, Apple may have to start giving more of its $137.1 billion cash pile to investors. The company’s dividend yield still lags behind other technology bellwethers. Intel Corp. pays out an indicated 4.3 percent, while Hewlett-Packard Co. (HPQ) pays 3.1 percent and Microsoft Corp.’s indicated yield is 3.3 percent.

Chief Financial Officer Peter Oppenheimer told analysts on a conference call that the company paid out about $4.5 billion of cash in dividends and stock repurchases in the recent quarter. Apple is considering increasing both, Oppenheimer said.

Inevitable Slowdown?

Given Apple’s size -- $156.5 billion in sales last year -- the slowdown was inevitable, according to a recent report by Toni Sacconaghi, an analyst at Sanford C. Bernstein & Co. If growth had continued at the same pace for another five years, revenue would reach $1.2 trillion, or the size of Australia’s gross domestic product, he said.

Any return to faster growth would depend on whether Apple can come up with another blockbuster product, such as a television, or find new customers in developing countries, including China.

“The timing of new products that could excite the market is going to be key to whether the stock continues to go down,” said Michael Walkley, an analyst at Canaccord Genuity. He said the days of Apple’s “meteoric rise” may be over.

Supply Constraints

Cook defended the company’s business on the call, saying revenue would have been higher if not for supply constraints that held back sales of the iPad mini, iPhone and iMac. He also expressed confidence in increased supplies and new products the company will be developing.

Some investors such as David Rolfe of Wedgewood Partners Inc. see renewed growth ahead for Apple. The company generated $13.1 billion of profit on sales of $54.5 billion in the first quarter while not being able to keep up with demand, he said.

“Any other company would love to have these problems,” Rolfe said.

To contact the reporter on this story: Adam Satariano in San Francisco at asatariano1@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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