by Will Ashworth | January 21, 2014 2:22 pm
Apple (AAPL) got slapped with a downgrade this morning by Societe Generale, which slashed its rating for AAPL stock from a “buy” to a “hold.” The French bank sees slower sales for the Apple iPhone 5, and set a 12-month price target of $575 for AAPL stock as a result.
That target is barely above where Apple stock currently trades. Plus, it’s early in 2014 and several firms have already downgraded AAPL stock.
Are these downgrades of Apple stock a signal to sell? I don’t believe so — and here are three quick reasons why.
Once again, Societe Generale, Wells Fargo and Standpoint Research have all ratcheted down their expectations for Apple stock already this year. And sure, in a bubble, these downgrades could definitely be construed as a negative sign for AAPL.
However, only Standpoint actually slapped AAPL stock with a “sell” … and that was because of Apple’s immoral behavior towards its workers in China. While Apple does need to do a better job when it comes to fair treatment of workers, I don’t think that should sway an analyst’s call on the stock.
And most of the time, it hasn’t. Only 2 analysts out of 52 have a “sell” or “underperform” rating on AAPL stock. Meanwhile, a majority (41) rate Apple stock a “buy” or “outperform”.
Everyone’s been talking about Apple’s deal with China Mobile (CHL) … and for good reason. InvestorPlace’s own James Brumley, for example, recently discussed the deal for AAPL to sell iPhones to its 760 million customers.
A few things of note: Those 760 million customers are 76% more than China’s other two major carriers combined. And with China Mobile in the fold, Apple could generate an additional 20 million in iPhone sales in 2014. That translates into an extra $9 billion in revenue and $3 per share in earnings … and should also mean a huge lift for AAPL stock.
According to Brumley, the China factor means that 2014 and even 2015 should be especially strong years … but then the easy pickings for growth on a global basis disappear. For AAPL stock to keep climbing after that, the company must be ready to innovate its way to growth, he says.
I believe it will be more than ready — which brings us to the final reason to be bullish on Apple stock.
AAPL stock first became a tech darling thanks to its innovation. The iPod was introduced in 2001, followed by the iPhone in 2007 and the iPad in 2010. That’s a new product every three years, give or take, which means Apple is overdue to make a splash in the electronics market.
But Apple has a few aces up its sleeve right now. With the hiring of Angela Ahrendts, for example, it’s clear Tim Cook wants its products (and stores) to be fashionable as well as functional. Remember, Ahrendts transformed Burberry (BURBY) into a $10 billion market cap company with global revenues of $3.5 billion.
Plus, Burberry’s use of technology is exemplary. Ahrendts will most certainly be able to fix whatever is ailing Apple retail stores … which is a good thing for AAPL stock.
Of course, this detail is more operational in nature. What Apple stock really needs is another hit — and fast. But there are possibilities in the works here too: the Apple iTV and the Apple iWatch.
The Apple iTV has been rumored for a couple of years now and many expect it will make its debut this fall. As for the smartwatch, the hiring of Ahrendts lays the groundwork for a successful launch in Apple retail stores. And given smartwatches are relatively new in the marketplace, any product intro from Apple would likely be well-received even with obvious flaws.
In the meantime, Apple can also widen its iPhone, bring out a 12.9-inch iPad and make cosmetic touchups to the rest of its products. That will hold things over if 2014 isn’t the year for innovation.
Apple stock is up less than 10% over the past 52 weeks vs. a 24% climb for the S&P 500. Yet Apple will likely report record profits and revenues for fiscal 2013 when it releases its fourth-quarter earnings Jan. 27.
And as James Brumley pointed out, AAPL could earn an additional $3 per share (an 8% pop) from its China Mobile deal in 2014, suggesting the near-term outlook for the company is very strong indeed.
So should you be worried by downgrades to AAPL stock? Not by a long shot. There is still plenty of room for Apple stock to run.
As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.
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