Apples most respected analyst (note not “anal”yst in this instance!) -Toni Sacconaghi of Sanford Bernstein’s view on Apple shares

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Apple, still the most valuable company in the world with a market value of $510 billion, has seen its shares slide more than 20 percent from a record $705.07 in September on a myriad of investors concerns. They include worries over price cuts and shrinking profit margins, the ability of Apple CEO Tim Cook and his team to keep executing and delivering compelling new products, and the prospects for growth in key markets, especially the smartphone market. The iPhone accounts for nearly half of sales at Apple and the majority of profit.

“Has Apple lost its mojo?” Sacconaghi asks about what he calls the “recent swoon” in the company’s shares. “Or does the pullback represent a buying opportunity for the stock? We believe the latter.”

And the reason, he says, is that Apple is making a transition from a “hyper-growth story” — with the iPhone and iPad helping to drive a 472 percent increase in Apple’s stock price over the last four years — to a “high-quality, branded consumer company” with slowing growth but loyal repeat customers.

First a quick recap of his numbers. Sacconaghi expects Apple’s sales growth to slow from 22 percent in 2013 to 15 percent in 2014 and 8 percent in 2015. By way of comparison, Apple’s revenue in 2012 was $156.5 billion, a 45 percent jump over 2011. And sales rose 66 percent in 2011 from 2010, so you see why single-digit growth in three years is notable. “Apple’s growth is slowing. It has to,” Sacconaghi notes. “If the company grew at the same pace it did over the last five years for the next five years, its revenues would be $1.2 trillion (yes, trillion), or nearly the size of Australia’s GDP.”

But while he points out the decelerating growth trend, Sacconaghi also points out why the sky isn’t falling. “While it’s true Apple’s growth is slowing, growth is still robust,” he writes, saying the law of large numbers is kicking in. So while “Apple will likely be a mid-single-digit growth company in the next three years…it will have a pristine balance sheet and be generating a mind-boggling $50 billion [or more] a year in cash after paying its current dividend.”

Here’s a recap of his takeaways – 

• The iPhone and iPad. Earnings will rise 35 percent in the next two years to reach $60 a share, based on continued demand for the iPhone and iPad. “The smartphone market is in its middle innings, likely to grow from 690 million units to 1.4 billion during the next five years. We believe Apple will probably lose overall market share if it does not bring out a lower priced iPhone. Nonetheless, a combination of market penetration and additional carriers (the iPhone is available at only 240 carriers globally, out of an estimated total of over 900) translates into 40% iPhone revenue growth in FY12-FY14. The tablet market is a juggernaut. Its unprecedented growth should persist — we forecast that market units will more than triple over the next five years. Even assuming share loss and price compression due to the Mini, we believe Apple’s iPad will enjoy strong growth.”

• A platform company. To naysayers who dismiss Apple as a “hardware company, with significant commoditization and subsidy risks,” Sacconaghi counters that Apple is a “platform company, driven by iOS, iTunes, iCloud, Siri, etc. and enjoys very high customer loyalty.” He also says that given competition among the telcos, it’s unlikely that wireless carriers might cut their subsidies on the iPhone or extend the phone upgrade cycles for subscribers (both of which would obviously dampen iPhone sales).

 • The changing Apple story. Sacconaghi estimates that more than 50 percent of Apple’s profits in 2015 will come from repeat customers. “That makes the Apple story very different: It will no longer be the hyper-growth company of the last five years, but rather a premium, branded consumer company, along the lines of Nike, Louis Vuitton and Saks — all of which trade at material premiums to Apple today,” he says. “Yes Apple is a different story, but we still like it.”

• Apple’s culture is all about new products. “Apple’s innovative culture offers significant option value,” he says. “Three years ago, the iPad did not exist. Today it generates $32 billion in annual revenues and as a standalone business would be the 11th largest U.S. tech company.” He says future “options” for Apple investors include lower-cost iPhones, a smart TV and more sales from advertising, e-commerce and search on the company’s mobile devices.

The bottom line: “As Apple transitions from a hyper-growth story to a more modestly growing branded consumer company, the shareholder base is changing…shifting from traditional growth investors, many of whom view decelerating growth as an automatic sell signal toward more ‘core’ or value investors,” Sacconaghi says. That may translate into continued “choppiness” in Apple’s shares, which may leave them “range-bound.” ”For longer-term investors, we believe that Apple offers a compelling combination of attractive growth, reasonable price and significant option value.”

SBM take – As we reasoned in prior blogs and per our Trading Call, while the stock is scratching $500 with over $100 in cash per share, we believe Apple shares now present a compelling medium term buy opportunity. If they do produce $60 per share in 2015, then putting a 10 times multiple on this and adding the likely cash pile of around $200 per share then gives a fair value of $800 per share. Discounting this back at say 8% p.a (very conservative disc rate) gets us to a current fair value of around $620 per share. We are long and remain long.

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