Why Apple Could Withstand Tech Crunch

Morgan Stanley foresees tough times for Apple, but other analysts argue that the portents of doom may be exaggerated.
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Updated from 12:59 p.m. EST

Plummeting consumer-technology sales could spell trouble for

Apple

(AAPL) - Get Report

's stock during the coming months, according to

Morgan Stanley

. Other analysts, however, argue that the portents of doom may be exaggerated.

Citing a survey of 2,500 U.S. consumers, Morgan cut its Apple price target from $105 to $95 Wednesday and warned that the tech bellwether's share price could suffer.

"We see near-term downside to Apple shares in light of weaker demand, especially for the iPhone, where expectations remain high," wrote Morgan analyst Kathryn Huberty in a note.

The analyst pointed to some key findings from Morgan's survey to illustrate this point. Even after recent price cuts, for example, Huberty notes that the number of consumers expressing an "extreme" interest in the iPhone was down from 7% in February 2007 to 5% now.

Morgan also lowered its Mac growth projection to flat, explaining that PC purchases over the next year are expected to be just half their 2005 levels. The survey also suggested that iPod penetration has peaked in the U.S. and new purchases by existing iPod owners this holiday season will fall far short of past years.

Huberty explained that only 6% of survey respondents who own an iPod plan to upgrade this holiday season, from over 40% in 2005. "Our sum of the parts analysis now assumes iPod is in permanent decline," she wrote.

Apple's stock has certainly struggled during recent months and is currently trading around the $100 mark, well below its 52-week high of $202.96.

Although smartphone sales are slowing, Apple may not be as badly affected as some of its competitors.

Nokia

(NOK) - Get Report

, for example, recently

cut

its fourth-quarter estimates for mobile device shipments, citing "insufficient visibility" in the market.

In an increasingly tough economy, the iPhone is actually gaining share from the Finnish technology giant, which has traditionally dominated the smartphone space. Apple's iPhone business is exploding, according to third-quarter figures from technology analyst firm

Gartner

, with sales growing more than 327% year-over-year, clearly boosted by the summer launch of the

iPhone 3G

.

Nokia's sales, in contrast, slipped 3% year over year, although the company still holds 40% of the smartphone market.

For the first time, iPhone sales also exceeded those of

Microsoft

(MSFT) - Get Report

Windows Mobile devices during the third quarter, according to Gartner

At least one analyst thinks that iPhone demand remains at a respectable level.

"Our recent distribution and supply chain checks indicate there is fairly healthy demand for the iPhone in the U.S., Europe, and most of Asia-Pacific. with mixed trends in Japan," wrote Shaw Wu, an analyst at

Kaufman Brothers

, in a note released Wednesday.

Apple shipped 6.9 million iPhones during its recent

fourth quarter

, way ahead of average estimates of 4.5 million, even prompting CEO Steve Jobs to fire a shot across the bows of

Research In Motion

(RIMM)

's BlackBerry device.

"Apple outsold RIM last quarter, and this was a milestone for us," Jobs said during a conference call, adding that Apple is now the world's third-largest mobile phone supplier.

Kaufman Brothers estimates that the consumer technology giant will sell around 6 million iPhones in the current quarter. Although this figure would represent a significant sequential drop from 6.9 million, it suggests that sales are hardly falling through the floor.

Apple may also team up with

Wal-Mart

(RIMM)

to sell iPhones in the

retail giant's stores

, according to as-yet unconfirmed recent media reports. There has also been speculation that this could pave the way for the launch of a $99 iPhone, although the

MacRumors

blog recently reported that this is unlikely.

Kaufman Brothers analyst Wu agrees that a $99 iPhone will not be on the shelves any time soon, but expects it will be someday.

"While the likelihood of a $99 iPhone this holiday season at Wal-Mart is low, due to channel conflict and need for uniform pricing, we continue to believe that this price point is inevitable as Apple rounds out its cell-phone business," he wrote.

Other parts of Apple's business, although impacted by the economic slowdown, remain relatively robust. For example, the company said it shipped 2.6 million Macs during its fourth quarter, slightly below consensus expectations of 2.7 million but representing revenue growth of 17%.

Although a major question mark hangs over PC spending in 2009, Kaufman Brothers argued in a recent report that there is still room for

sizable growth

in Apple's Mac and iPhone businesses.

iPod sales, however, could be more problematic.

Pacific Crest

, for example, estimates that iPod sales will decline 9% in fiscal 2009. The analyst firm, which cut its 2009 iPhone estimate from 18.5 to 18 million units Wednesday, also expects Mac sales to decline 2%.

Pacific Crest, which also lowered its 12-month Apple price target from $175 to $160, nonetheless feels that the company's prospects remain strong.

With more than $24 billion in cash and a rock-solid brand, the tech giant is well positioned to weather the current economic storm, according to Pacific Crest analyst Andy Hargreaves.

"The combination of solid fundamentals, a sound balance sheet and a tailwind from falling commodity prices should help Apple to generate superior cash flow in fiscal 2009 and allow Apple to outperform its peers," he wrote.

After the Bell

: Of the stocks mentioned in this article, Apple closed Thursday's trading session down $3.21, or 3.3%, at $95; Microsoft ended down $1.16, or 5.6%, at $19.45; Google closed down $8.60, or 2.8%, at $300.22; Wal-Mart closed down 22 cents, or 0.4%, at $54.79; Nokia closed at $15.22; and RIM closed down 97 cents, or 2.5%, at $37.47.