Wedge Partner’s Brian Blair is out telling clients to cash in their chips in Apple (NASDAQ:AAPL):
We are bullish on Apple, and we consistently have been, holding a positive view of the company and calling it the best name in tech on the growth of the iPhone and the iPad. Although that view hasn’t changed, we wanted to highlight something we have noticed of late that gives us pause, and forces us to take the sidelines here at nearly $620 per share. Why? We’re concerned iPad sales may not be as strong as expectations, and we believe March could disappoint and full year production iPad expectations/forecasts may be pulled down as a result.
But What about the 3 Million Units?
The opening weekend number of 3 million was significant, and of course spoke mostly to pre-orders and to strong weekend sales from Apple’s biggest fans, but in looking at the overall demand picture, there doesn’t appear to be as much of a frenzy as we expected over the new iPad. We can walk into any Apple store and get one today, easily, and that may be a problem, given rising expectations. If existing units in the channel take longer than expected to be digested by consumers, then manufacturing will be pulled back in the June quarter, and estimates for the full year will also be pulled down.
Our iPad Unit Expectations for 2012
We had expected around 9-10 million units for March, a lofty number coming off December, but have noted some expectations jumping to the 12 – 13 million unit range for this quarter. Our iPad unit expectations for CY 2012 have been between 56-60 million units and we have believed 60+ million was possible. We now believe that the full year number will likely be at the bottom of that range, possibly lower. We will reassess our unit expectations post Apple’s quarter report.
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REMOVED
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The Risks: High Expectations Too High for March
In summary, given the lofty expectations for Apple, and the recent 63% rise in share price from $380 in December to $620 yesterday, along with the litany of $700+ price targets (we have counted over 9) and raised numbers across the Street, we feel it’s prudent to take the sidelines at these levels until the company reports earnings. We see a potential disconnect, between the rising price targets/unit expectations and the broad availability of the new iPad, and pieces of evidence that suggest a potential for waning demand in the U.S. The stock may be priced for perfection at current levels, but we feel we are seeing signs of some scratches on the glass, which is reason enough to step aside for now.
Notablecalls: This is big. AAPL will be down on this. 10-15 pts. Actionable Call ALERT
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Almost funny. “Observational analysis,” made in the absence of consideration of other explanations. 3 million pre-orders and then no lines doesn’t necessarily mean dropoff of demand.
Try this.
In the past, Apple stores could not forecast demand accurately. And so, you saw long lines. In response, this time, Apple stores encouraged customers to pre-order on line, and to request home/business delivery vs. in-store pickup. Apple took over virtually all air freight capacity from China to the USA, and organized a sophisticated distribution chain to put merchandise into stores, many of which are in shopping malls filled with instant-gratification shoppers.
Once the Chinese gray-market dealers in New York got the picture YOU didn’t get – there would be plenty of ipads available at list price in China – they realized their markups would be unsustainable, and they rushed to return what they bought.
Result? Observers like you issue a punishing re-evaluation of demand. Tim Cook does his job and you think it means low demand. The 3 million pre-orders skimmed off the crowds that usually form for new product launches. I was in a local Apple store on March 7, and amazingly, people were buying iPad 2s at full price even though Apple had just announced a $100 price cut. Meanwhile, the rest of us were banging away at the Apple online store until we got our pre-order in for a March 13 delivery. I tracked my pre-order, and discovered it was waiting since March 9 at a Fedex depot in, I think, Mechanicsburg, PA. It sat there until the 11th, when it finally went to a MA depot on the 12th for delivery on the 13th. 3 million pre-orders – biggest in Apple history – and Apple was ready.
That – unlike your “observational analysis” – is meaningful. Apple was more than ready for unprecedented demand.
What’s really invisible is not just the inventory management system that made this launch availability different – it’s the industry pre-orders and orders. One Apple business rep told me that when the iPad 2 was announced, maximum industrial pre-orders averaged 6000 units. For the iPad 3, orders of 20,000 units were “not unusual.”
In closing, with all due respect, your observational analysis is sophomoric. It reminds me of the scientist studying hearing in house flies. He placed one under a bell jar, tapped it, and the insect took flight. He then tore one wing off, tapped on the bell jar again, and the fly tried to fly, but just flipped over on its back and buzzed. The scientist then tore off the second wing, and tapped on the glass. The fly stayed motionless. He tapped repeatedly on the glass, to no effect. He then entered into his notebook, “If you tear the wings off a fly, it goes DEAF.”
That, IMHO, is the value of your observational analysis.
One issue with this logic (which I think IS worth considering), is apple was caught with its pants down, BADLY, for the iPad 2. Shipping waits grew to as much as 6 weeks. Their ceo’s specialty is greasing product flow with suppliers, and it is quite possible, and likely, that this hard lesson has been learned. Availability could be GOOD news. Our answers will come.