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Three Major Changes for Apple (AAPL) in 2013

January 7, 2013 5:04 PM EST Send to a Friend
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Goldman Sachs' technology hardware research team listed its Top 10 issues to watch in 2013 and three directly center around Conviction Buy List-rated Apple (Nasdaq: AAPL):

Apple may be ready to test lower wholesale price points for the iPhone. Goldman said given Apple's expansion into emerging markets, which have a predominantly prepaid customer base, the timing may be right for the introduction of a lower-cost phone. The firm said there is room in the market for a lower-priced phone with specs similar to the recently discontinued iPhone 3GS. They expect such a move will reignite investor concerns about gross margin dilution, but believes that making the iOS ecosystem more accessible should ultimately help expand and strengthen the installed base.

Shorter Apple product cycles could be a critical positive for the story. Goldman said Apple refreshing its traditional iPad line just seven months after the third-generation iPad was launched could signal the company is moving away from its traditional 12-month product cycles and towards a more rapid 6-month refresh cycle. Recent datapoints suggests another refresh for the iPad this Spring. If Apple were to due this with iPhone as well, then this would be a substantial change in Apple's product development strategy, the firm notes. "We would view a shortening product cycle cadence as good news for three key reasons: (1) this would potentially ease the violent quarterly swings in product demand we have seen in between product cycles, particularly for the iPhone, and this could smooth quarterly unit shipments over time; (2) this smoothing of demand would also help relieve the constraints we tend to see in the supply chain (and lower costs for Apple), as Apple wouldn’t force the supply chain to abruptly increase then decrease production around major annual refreshes; and (3) Apple would leave less room for competitors such as Samsung to capture share in the off-quarters before Apple's product refreshes.

We may finally see what changes Apple has in store for TV. The firm said while it is consensus that Apple will somehow address the TV market the actual strategy remains in question. The firm sees three possible approaches that Apple could take in attacking the market:

  • An Apple-branded TV - "As content consumption continues to grow, it follows that iOS device users will want to be able to easily view this content on their televisions. While this can be done through peripherals today, any Apple TV user can likely attest that the experience is far from seamless; an integrated television could solve this. In addition, we believe Apple has avoided launching a television in the past because it has had a difficult time securing licenses for an appropriate amount of digital movies and television content. Nevertheless, Apple’s available media content has been steadily increasing, and the company could be further along in addressing this issue. Despite these factors, however, we believe an Apple branded television could easily be niche and high-end."

  • A set-top box could reach a wider audience - "A broader penetration strategy would be a set-top box approach in which Apple partners with cable/satellite providers to deliver a set-top box to consumers. Here, Apple would be able to skirt many of the content licensing challenges that have slowed progress in the past. Nevertheless, the company would face a set of different challenges in trying to negotiate with the cable/satellite providers who vary greatly in their willingness to cooperate with third parties and many of whom have their own efforts underway to improve the user interface. With a set-top box approach, Apple would likely want to gain control of the entire user interface, which would enable it to more easily and elegantly tie live TV content with iCloud and iTunes media, as well as bring in its massive installed base of hardware devices."

  • Licensing iOS to TV OEMs would be a departure, but not unprecedented - Another possible approach to the television market would be for Apple to license its OS to TV OEMs. This would potentially allow Apple to reach the broadest possible audience, though it would be remarkably out of character for Apple given its penchant for tight device-platform integration. While we view this strategy as least likely, it is worth noting that Apple has departed from its integrated approach with cars.

    Conviction Buy List-rated Apple (Nasdaq: AAPL) remains the firm's top pick with a $760 price target.

    The firm's full Top 10 issues to watch in the hardware sector in 2013 are:
    1) PC demand may find a bottom and settle into the "new normal"
    2) Traditional enterprises will adopt white-box servers, but slowly
    3) Enterprise flash is becoming mainstream, forcing incumbents to react
    4) Apple may be ready to test lower wholesale price points for the iPhone
    5) Shorter Apple product cycles could be a critical positive for the story
    6) We may finally see what changes Apple has in store for TV
    7) MPS pricing may be the next source of pressure for printing OEMs
    8) Deep value tech may move beyond just a short-term laggard trade
    9) Leverage likely to increase as cash remains stranded overseas
    10) Benefits of HDD consolidation could be tested as pricing normalizes

    Besides Apple, Buy-rated EMC (NYSE: EMC) is their favorite name in the enterprise. Buy-rated IBM (NYSE: IBM) remains an important counter-cyclical component, the firm notes. A preffered value name is Buy-rated Dell (Nasdaq: DELL). Meanwhile, the firm's least favorite names are Sell-rated QLogic (Nasdaq: QLGC) and Emulex (NYSE: ELX).




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