How far can fanboys carry Apple?

Apple reported its results for the fiscal fourth quarter on Monday and it has been on something of a roller coaster ride since then. Shares fell 4% immediately following Apple’s report as investors balked at Apple’s slowing earnings growth, which handily topped consensus estimates but missed the Street’s steep whisper numbers. Shares climbed back into the black on Tuesday morning as a number of big banks increased their price targets and fiscal 2014 outlooks, and then it spiked again on Wednesday morning following a round of positive early reviews for the new iPad Air, which launches this Friday. But where the next few quarters are concerned, several important questions are now being raised.

With Apple’s iPhone launches and iPad unveiling behind us and nothing new and exciting on the horizon until the second half of 2014 according to rumors, some analysts are worried that sales may fall faster than expected in the coming months. Among them is Sector & Sovereign Research’s Paul Sagawa, who shared some interesting thoughts in a recent note to clients.

Sagawa pointed out that Apple’s September quarter results were fairly strong, but they also mark the company’s third consecutive quarter of earnings deterioration as EPS fell 4.7% compared to Apple’s fiscal third-quarter results. The analyst also noted that the “full impact” of Apple’s new iPhones, the iPad Air and the new Retina iPad mini will be felt in the current quarter, which leaves subsequent quarters in question.

“Near term, Apple is justifiably confident in sustaining [its current] margins,” Sagawa wrote in his note. “The products are brand spanking new, positioned well against a known slate of high end alternatives. Looking at the number of iPhone customers likely up for renewal at subsidy granting carriers suggests that there may be more than 40M iPhone 4 and 4S users ready for upgrades in F1Q14. Last year it sold 47.8M iPhones during the holiday quarter and odds are good that it will shatter that record this holiday quarter, yielding topline upside to Apple’s $55-58B sales guidance for FQ1 2014.”

He continued, noting that the falloff following Apple’s huge holiday quarter could end up being substantial as the “fanboys” that drive huge sales in Apple’s December quarter find themselves with nothing left to buy.

“By January, many of the Apple fanboys will already have their iPhone 5Ss and iPad Airs, and demand will hinge on new customers with less invested in the Apple brand and minds open to the raft of new Android powered products likely to hit the shelves,” the analyst opined. “In the last few years, Apple has grown increasingly seasonal, with robust product introductions in the fall followed by 6 months of relative disappointment. Last year, March quarter revenues were off 20% vs. December, and June saw another 19% sequential drop. This year, analysts are hoping for a 19% drop in March, and a 12.5% drop in June. History says the cyclicality should be getting worse, not better.”

Sagawa concluded by stating that Apple may be looking at full-year growth in the low single-digits for fiscal 2014. “Even if gross margins can come up a little bit, it is hard to imagine investors getting very excited about 4 or 5% earnings growth without a clear path to better growth further down the line,” he wrote. “Given Apple’s massive sales and industry defying profitability, it is difficult to see where that growth will come from. Bulls will prostelytize [sic] about cash flows and valuation, but history has given us a clear example of a wildly profitable and cash rich company that struggled with growth – see Microsoft, circa 2003.”


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