Apple Upbeat for the Holiday Season - Analyst Blog

By Zacks Equity Research,

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Buoyed by robust sales on Black Friday and Cyber Monday, Apple Inc. ( AAPL ) is likely to report another blockbuster holiday season.  Analysts believe that the ongoing holiday season sales will be one of the strongest for Apple in recent times. Apple sold 7.33 million iPads and 16.24 million iPhones during the 2010 holiday season, which drove year-over-year revenue growth of 71.0%.

Apple, which seemingly offers the weakest discounts ($101 discount on the MacBook Air, MacBook Pro and iMac, $41 discount on low-end iPad 2s, $61 discount on high-end iPad 2s, and $11 on iPod Nano) among gadgets retailers, surpassed its Black Friday one-day sales expectation by miles. However, the exact sales figures were unavailable.

According to analyst Piper Jaffray, Apple sold about 15 iPads per hour at Apple Stores on Black Friday, a 68% increase from last year. Apple also sold about 10 Mac computers per hour, up 25% from a year ago. The analyst projects Apple to sell 13.5 million iPads in the current quarter, an increase of 84% from the year-ago period.

The same trend was also witnessed on Cyber Monday. E-commerce giant eBay Inc. ( EBAY ) sold four iPads every two minutes on Cyber Monday. As per Nielsen Co., iPad has topped the list of most-wanted holiday gifts for the second year in a row, and has garnered massive popularity among kids aged 6-12.

Notwithstanding the apprehensions of some analysts regarding soft iPad sales for the fourth quarter, due to supply-chain problems and increasing competition from Amazon Inc.'s ( AMZN ) Kindle Fire, we believe that iPad will report record fourth quarter sales. Moreover, this strong growth is also expected to boost Apple's retail sales for the fourth quarter.

Analysts also claim that Apple's iconic iPhone registered strong sales on Black Friday. This was primarily attributed to the launch of the iPhone 4S, and strong demand for the discounted iPhone 4 and iPhone 3GS. AT&T Inc. ( T ) has gone as far as to say that the demand for iPhone devices is expected to boost the overall smartphone market for the fourth quarter. According to AT&T, the new iPhone 4S possesses higher download speed (downloads three times faster) and unlike the earlier versions, users can talk and surf at the same time on its HSPA network, which is believed to be the primary reason for its growth. 

What lies ahead?

The speed with which Apple products are disappearing from the shelves this holiday season comes as no surprise. The high demand for iPad, iPhone and also Mac (which is undoubtedly encouraging at a time when the PC market is suffering from low demand and cannibalization from tablets) suggests that Apple is here to stay for a very long time.

The only question is regarding its ability to sustain its current momentum. We note that Apple is one of those very few stocks, which has outperformed the broader S&P 500 market year-to-date in 2011. Also, for a brief period of time this year, Apple was the most valuable company in terms of market value, surpassing Exxon Mobil Corporation ( XOM ) . However, questions linger about Apple's opportunities in terms of its existing portfolio of products and innovations going forward.

We all know that the current portfolio (which consists of iPhone, iPad, Mac products, iPod, iTunes) faces significant headwinds with respect to competition, lawsuits, market saturation and supply chain constraints and this could hurt its profitability down the line. Still, we believe that the existing portfolio has much more to offer over the next few years.

Although Apple lost the #1 smartphone maker position to Korean manufacturer Samsung Electronics, we believe that it could be difficult for the Galaxy maker to sustain its lead in the global smartphone market for a very a long period of time. This is primarily due to the superior user experience that is the natural result of the tight integration across its hardware, software and services. Apple has been aggressive in opening retail stores in the recent past and we continue to believe that Apple has immense growth opportunities in some of the emerging world economies, where smartphone penetration remains low to date.

We believe that markets such as Eastern Europe, Africa, the Middle East and a major part of the Asia-pacific, particularly China and India present a huge growth opportunity for Apple, primarily due to the rapidly growing middle class, which forms a significant part of the total population. In September this year, Apple acquired 40 patents in China, which will likely be the foundation for its growth in China.

We also believe that Apple's ability to spur the popularity of its products in developing nations, where pricing is often an important consideration, will go a long way toward deciding the company's future growth. The company's sizeable cash balance will no doubt come in handy.

According to Gartner, iPad is expected to maintain a market share of more than 50% in the tablet market till 2014. We also believe Apple has significant growth opportunities from iCloud and Apple TV over the long term. The company can foray into online streaming business which will also be a rewarding market in our view.

However, the most important factor for Apple's growth will be the number of innovations it continues to make going forward. Apple is renowned for its innovative devices and investors are always eager to see something new from the company. Although this puts the current management under tremendous pressure, we believe that Apple has the talent and pro-activeness to fulfill such desires.

The company is yet to pay any dividend and has also not undertaken any share repurchase activity. But still, no one is complaining because significant growth opportunities exist that could further increase returns for investors.

Our Take

There has been much speculation and debate over Apple's future after the demise of its iconic founder Mr. Steve Jobs. Investors were eager to see whether the company continues to strictly adhere to the policies of Late Mr. Jobs or tread a new path, as the company remains entangled in lawsuits and continues to see tough competition.

It will be interesting to see how the new management team responds to these headwinds and also to the growing demands of the industry. While we expect Apple to remain a leader we think that these could be significant challenges for Apple going forward.

We remain Neutral over the long term (6-12 months). Currently, Apple has a Zacks #2 Rank, which implies a Buy rating in the near term.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Stocks
Referenced Stocks: AAPL , AMZN , EBAY , T , XOM

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