Zacks updates Apple rating to 'outperform'
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Zacks updates Apple rating to 'outperform'

After a stellar first quarter, Zacks Investment Research (http://www.zacks.com) has upgraded Apple from Neutral to Outperform with a price target of US$654.

Apple reported robust revenues, driven by strong holiday season sales based on the ramp in demand for the new iPhone 4S. Better-than-expected sales from the iPad and Mac series also helped Apple to register a stupendous first quarter 2012.

Apple is widely recognized as a leading innovator in the consumer electronics market, according to Zacks. After successfully rolling out the iPod, iPad and iPhone, the company launched its iCloud services in October 2011. Currently, Apple's cloud strategy is focused on developing storage and streaming services.

In Zacks' view, Apple has a loyal customer base and products launched by Apple have been extremely successful historically. Given Apple's significant brand equity, the company has been able to create and maintain a dominant position in nearly all its served markets, the research group says.

What's more, the iPhone 4S has gained tremendous success since its release in October 2011 on the back of an increased number of carriers operating all over the world (total number of carriers are now 230 spanning 105 countries) coupled with robust holiday season sales in 2011.

The iPhone remains Apple's key growth driver in international markets, with two-thirds of iPhone sales now coming from overseas. Zacks believes that strong international growth will compensate for the slowdown in the domestic business going forward.

Apple's international sales, especially in markets such as Russia, Brazil, the Middle East and a major part of the Asia-Pacific, particularly China and India present huge growth potential for the company, primarily owing to the growing affluence of the middle class, which forms a significant part of the total population.

Apple's iPad 2 tablet continued its momentum and the release of the new iPad will extend its leadership in the tablet market, says Zacks. Also, there are rumors about the launch of the new 8GB iPad 2 to compete against the Windows 8-based tablet computers.

"If this happens, the forthcoming quarters will likely enjoy robust gains. In either case, we continue to believe that significant market share gains will drive top-line growth going forward," says Zacks. "However, Apple is facing tremendous competition in the smartphone as well as tablet market. In the mobile hardware segment, Apple has a host of large competitors ... Additionally, we believe lesser barriers to enter the market is increasing the competition for iPad. Several new entrants such as Amazon.com Inc, Motorola and HTC are flocking to the market. Apple is expected to face significant competition from Amazon's Kindle Fire going forward."

Lastly, Apple remains entangled in various legal battles over its mobile and tablet products, says the research group. The company is fighting a number of lawsuits against its long-term technology partner Samsung in several countries including the U.S., Australia, Germany, Korea, Japan, the Netherlands, Britain and France.
As competition heats up in the mobile and tablet space, we believe Apple will have to deal with a larger number of lawsuits. Thus, increasing legal expenses will be a negative for Apple's operating profit going forward.

"Nonetheless, we believe that Apple remains the biggest growth story in the technology sector, primarily on account of its superior product pipeline, Apps, strong iCloud revenues, the iPad loyal customer base and international expansion going forward," says Zacks. "Despite the legal complexities and increasing competition in iPad and iPhone segments, we are optimistic about the company's growth prospects in the long term."

 

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