Analyst: Apple Has Much Explaining To Do
Apple (NASDAQ:AAPL) acknowledged some investor concerns last week by reacting to Greenlight Capital’s statement about the company’s capital allocation practices. But is this enough? According to Barclays Capital’s Ben Reitzes, the iPhone maker now needs to take the next step by hosting analysts who advise its shareholders.
According to Reitzes, Apple has reached a mature business stage from where it can offer its investors guidance about how its “legendary business model” can keep delivering steady returns. Most tech companies are known to have such an Analyst Day, but Apple has refrained from conducting one since 2003.
Such an event would give Apple the chance to make a case that it can increase revenue over time by “mid to higher single digit” percentages, increase profits in the double digits, and raise the dividend by double digits as well. “Right now we believe that investors are factoring in a sub-10 percent long-term EPS growth rate for the company,” Reitzes writes.
While the analyst does not think Apple will actually follow this recommendation, he does have a list of topics he would like to hear about from the company.
Firstly, he wants Apple to talk about how it is a platform company and how that helps it achieve revenue stability. “Apple needs to prove that its platform is what makes it much different from fallen angels like Research In Motion (NASDAQ:BBRY), Nokia (NYSE:NOK) and Motorola (NASDAQ:GOOG) – and more like Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), or Google,” the analyst writes.
“We believe Apple can turn perceptions of its platform around with a real move into payments, an integrated iOS-led television service and improvements to iCloud … and re-convince investors that Apple’s ecosystem carries a high switching cost and reinforce the value of an ‘iOS subscriber,’” Reitzes writes.
Next, investors need to be given a better idea of what Apple views as its total addressable market.
“We believe Apple’s total addressable market is still very large considering what traditional markets it can disrupt and what else it can do,” he writes. “At the moment, we believe Apple has a $500 billion-plus market opportunity with existing products, focusing only on the PC, smartphone, and tablet market.”
Thirdly, the iPhone maker needs to discuss a margin philosophy that brackets and sustains a gross margin range of more than 35 percent. “Recently investors have become very concerned that the rise of Android will pressure margins into the lower 30 percent range vs. the 38 percent range currently,” Reitzes writes. “Investors need to be reassured that movements to the low-end of markets don’t necessarily mean margin destruction.”
According to the analyst, each point in the margin equates to about $1.50 in earnings per share based on fiscal year 2013 revenues, so this is an incredibly important metric.
Fourthly, Reitzes wants Apple to discuss how it views its cash holdings and how these can be used to drive dividend growth. ”Apple may soon have to bow to intense pressure from shareholders to release more value from its growing cash hoard,” he writes. “If Apple’s revenue is set to slow, we believe it is the right thing to consider.”
Lastly, it is important for Apple to talk about how it views itself against other similar companies.
“Compared to other elite consumer and technology companies, Apple is trading well below its peers on a forward twelve month price-to-earnings ratio and cash flow basis,” he writes. “We believe it makes sense for Apple to be valued in comparison to blue-chip companies like Wal-Mart (NYSE:WMT), GE (NYSE:GE), and Coca-Cola (NYSE:KO) because it is a well established brand and platform that also brings in stable cash flow.”
While such an event would let Apple offer its views on product philosophy, social responsibility, and history of innovation, there would be no need of divulging any product secrets, according to Reitzes, who has an Overweight rating and a $575 price target on the stock.
Don’t Miss: Apple v. Einhorn Might Be Over Soon.