Although he lowered Apple (AAPL)’s price target to $600 from $725 and predicted that “in the near term, Apple’s stock might continue to be choppy,” Sanford Bernstein analyst Toni Sacconaghi said Wednesday that the iPhone maker still has innovation and growth ahead of it.
“On the positive side [following the company’s Q2 earnings report], they did a very significant return of cash to shareholders. At the very high end, I think, of where investors were hoping, and all else being equal, that was a positive,” he said. “On the flip side, there was evidence of gross margin pressure in the quarter. They were down sequentially, and the company guided for gross margins to go down again sequentially next quarter. This is worrisome because Apple is at the part of its product cycles where it’s introduced new products where typically gross margins should be improving. So, to see margins down — even adjusting for mixed effects, we believe iPhone margins were down in the quarter — is worrisome.”
Sacconaghi acknowledged that based on concerns about later product introductions and a continued squeeze on profit margins, Apple’s lowered Q3 guidance was troublesome.
“Ultimately, my gross margin numbers came down, and my estimates came down, and my price target came down commensurately,” Sacconaghi said.
When asked about his reasoning for maintaining an ‘Outperform’ rating on the ticker when he sounded rather negative on the underlying Apple story, Sacconaghi responded:
“If you believe innovation is alive and well at Apple, then numbers are likely to go up, the stock is inexpensively valued and sentiment is likely to become more favorable on the stock. If you don’t believe that premise, we could debate the valuation – it’s probably worth somewhere between $350 and $400 – but I believe the former, and that’s the basis for our ‘outperform’.”