Gasp! A Less Than Bullish Apple Analyst?

Citigroup's Richard Gardner is pulling back from Apple. Here's why, and why he might just be right

by Arik Hesseldahl

To characterize Apple's first-quarter earnings as excellent is the epitome of understatement.

In the first three months of the year, profit ballooned by 88%, to $770 million. The per-share earnings of 87 cents made Wall Street forecasts of 64 cents to 67 cents look downright conservative (see BusinessWeek.com, 4/26/07, "Apple's Sweet Profits and Sour Legal Woes").

In response, many analysts were quick to issue upgrades. Shaw Wu of American Technology Research led the pack, boosting his target price to $145 a share, while the average target price among analysts is sitting at $123 and change. Either scenario is pretty bright, considering Apple (AAPL) shares closed on May 2 at $100.39.

There's reason to expect the good times to last. Demand for Macintoshes and iPods is robust, and the forthcoming iPhone music-playing wireless device is expected to be a huge sales catalyst.

One Bad Apple?

Indeed, it would appear that everyone loves Apple these days, if not for the likes of Citigroup (C) analyst Richard Gardner. He's covered Apple for about 10 years, and even as his counterparts at other firms gushed, Gardner urged caution: Hold the Apple stock you have, but don't buy any more, for now.

The call ranks Gardner as easily the most prominent Apple analyst who's not advocating buying more. On Apr. 26 he reduced his rating on Apple from "buy" to "hold." At the same time he raised his 12-month price target to $110 from $105, adding that he'd be "more aggressive" if the stock were to retreat to about $90. Translation: The time for accumulating Apple stock is over. Wait for the price to go lower before you start buying again.

It's probably not right to describe Gardner as "bearish" on Apple. "To be clear, we have no issue with medium- to long-term fundamentals on Apple," he says in his note. "Our modeling simply suggests that forthcoming products like the iPhone are fairly reflected," in earnings estimates. He didn't return calls requesting an interview, but his views are pretty clearly outlined in the note.

Forget Those High Profit Margins?

His argument is simple: Much of the good news that investors can expect from Apple, whether it's related to the iPhone, AppleTV, Macs, or iPods, is already accounted for in the stock price. Consider the favorable pricing environment on many of the components used in Apple's machines. Low component prices buoyed results in the most recent period, but they won't last. Apple executives didn't say which components had the favorable pricing, but it's not hard to guess.

Chips from Intel (INTC) are probably cheaper than they would otherwise be at the moment, given the company's price war with Advanced Micro Devices (AMD). Meanwhile, prices on the memory chips that go into the iPod nano and iPod shuffle are starting to firm up. Market research firm iSuppli last month said it expects a shortage on flash chips to hit the market in the second half, as suppliers like Samsung and Hynix slow flash production and shift attention to DRAM memory chips that go into PCs. That will put an end to the market glut of flash and tighten supplies, boosting prices.