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UPDATE: Citi's New New "Buy" Rating on Apple (AAPL)

November 26, 2012 7:07 AM EST Send to a Friend
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Price: $524.75 -1.31%

Rating Summary:
    51 Buy, 13 Hold, 3 Sell

Rating Trend: = Flat

Today's Overall Ratings:
    Up: 23 | Down: 10 | New: 20
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(Updated - November 26, 2012 11:55 AM EST)

Having a "Buy" rating on Apple (Nasdaq: AAPL) is nothing new. Data shows 50 of 58 firms that cover the stock rate shares at Buy. However, what is interesting about Citigroup's new "Buy" rating on the iPhone maker Monday is the unique team approach they used in their coverage.

To launch coverage on Apple, Citigroup put together a team lead by by Glen Yeung (Semiconductors), but with co-coverage by Walter Pritchard (Software) and Jim Suva (Hardware). Citigroup said the team approach "reflects Apple's broad impact to the technology supply chain and allows us to uniquely follow the company from several industry angles."

The Citi teams notes that Apple's recent sell off is consistent with past corrections in its own history and that of its peers. "Our analysis shows that Apple shares have corrected consistent with the average correction in its own history, with companies that have achieved 4% of the S&P500, and with companies that have shown similar deceleration," Citi notes. "Historically, such corrections are followed by 20%-50% appreciation in the following 12 months."

The firm notes that their price target is of $675 is 11% below the consensus. They say this is related to the opinion that risks for Apple (competitive, market, and profit) are increasingly coming into focus.

The Citi teams notes that observation of Apple shares versus its year-over-year growth helps explains the recent sell-off. "To be sure, Apple's eco-system has built-in defense mechanisms mitigating downside. However, in our opinion, the increasingly evident risks bring the trajectory of growth and profitability into question, limiting multiples - hence our below consensus target. Observation of Apple's share price and its y/y revenue growth illustrates the impact of slowing growth."

Commenting on the smartphone market, the firm said while seemingly still young, is already showing signs of maturation. They see growth predominantly from the low-end smartphone market, a market currently under-served by Apple. The firm said deceleration for iPhone sales is a "virtual certainty" in the next 6-18 months. That said, Citi sees upside potential in tablets. "We expect tablet penetration to reach 14% in 2015, well above 3d party forecasts of 10%, and leading to an 18% CAGR for iPad 2012-2015, above these same 3rd parties' estimates." Unfortunately, a higher mix of iPad has a deleterious effect on gross margin, the firm also notes.

For an analyst ratings summary and ratings history on Apple click here. For more ratings news on Apple click here.




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