April 30, 2013

Apple Inc.
SUMMARY
Current Recommendation Prior Recommendation Date of Last Change Current Price (04/29/13) Target Price

(AAPL-NASDAQ)

NEUTRAL
Outperform 08/09/2012 $430.12 $452.00

Earnings Update: Apple Misses 2Q Earnings Estimates

Apple s second quarter revenues and earnings missed the Zacks Consensus Estimate. Though revenues improved on a year-over-year basis, the company witnessed margin contractions due to unfavorable product mix and increase in operating expenses, as a percentage of revenue. These factors led to a year-over-year decline in quarterly earnings. Nonetheless, we believe that Apple is well positioned to gain from international expansion going forward. Moreover, the recent shareholder friendly moves such as higher dividends and more share buybacks are expected to drive the stock going forward. Thus, we maintain our Neutral recommendation on the stock and set a price target of $452.00.

SUMMARY DATA 52-Week High 52-Week Low One-Year Return (%) Beta Average Daily Volume (sh) Shares Outstanding (mil) Market Capitalization ($mil) Short Interest Ratio (days) Institutional Ownership (%) Insider Ownership (%) Annual Cash Dividend Dividend Yield (%) 5-Yr. Historical Growth Rates Sales (%) Earnings Per Share (%) Dividend (%) P/E using TTM EPS P/E using 2013 Estimate P/E using 2014 Estimate Zacks Rank *: Short Term 1 3 months outlook
* Definition / Disclosure on last page

$702.10 $390.53 -26.21 1.03 17,202,066 939 $403,908 1.30 64 0 $10.60 2.46

Risk Level * Type of Stock Industry Zacks Industry Rank *

Average, Large-Blend Comp-Micro 244 out of 267

ZACKS CONSENSUS ESTIMATES

Revenue Estimates
(In millions of $)

Q1 (Dec)

Q2 (Mar) 24,667 A 39,186 A 43,603 A 45,851 E

Q3 (Jun) 28,571 A 35,023 A 37,842 E

Q4 (Sep) 28,270 A 35,966 A 41,348 E

Year (Sep) 108,249A 156,508A 177,305E 195,500E

2011 2012 2013 2014

26,741 A 46,333 A 54,512 A 56,347 E

47.1 62.3 N/A 10.3 10.6 9.4 3 - Hold

Earnings Per Share Estimates

(EPS is operating earnings before non-recurring items, but including employee stock options expenses)

2011 2012 2013 2014

Q1 (Dec) $6.43 A $13.87 A $13.81 A $14.01 E

Q2 (Mar) $6.40 A $12.30 A $10.09 A $10.82 E

Q3 (Jun) $7.79 A $9.32 A $7.60 E

Q4 (Sep) $7.05 A $8.67 A $8.99 E

Year (Sep) $27.67 A $44.16 A $40.49 E $45.59 E 15.3

Projected EPS Growth - Next 5 Years %

2013 Zacks Investment Research, All Rights reserved.

www.Zacks.com

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RECENT NEWS
Apple s second quarter 2013 earnings of $10.09 per share missed the Zacks Consensus Estimate by approximately $0.09. Earnings per share declined 18.0% year over year and 26.9% sequentially in the reported quarter. Revenues Total revenue was up 11.3% year over year but declined 20.0% sequentially to $43.60 billion, slightly ahead of the company s guided range of $41.0 billion to $43.0 billion. However, revenues fell shy of the Zacks Consensus Estimate of $44.30 billion for the fourth consecutive quarter. iPhone unit sales climbed 7.0% year over year but decreased 22.0% from the previous quarter to 37.43 million. Revenues climbed 3.0% from the year-ago quarter but plunged 25.1% from the previous quarter to $22.96 billion in the quarter. iPhone growth continues to be driven by strong adoption from a number of U.S. government agencies as well as companies such as Cisco and GlaxoSmithKline. iPad unit sales jumped 65.0% year over year but plunged 40% sequentially to 19.48 million. iPad revenues were up 39.6% year over year but declined 18.1% quarter over quarter to $8.75 billion in the quarter. Apple experienced strong iPad sales in most of its markets, particularly in Greater China (up 138.0% year over year) and Japan where sales more than doubled on a year-over- year basis. Apple shipped 3.95 million Macintosh in the reported quarter, down 2.0% from the year-ago quarter and 3.0% on a sequential basis. Revenues increased 7.0% year over year but declined 1.0% quarter over quarter to $5.45 billion. iPod units and sales on a year-over-year basis continued to decline in the quarter. Apple sold 5.6 million iPods (down 27.0% year over year) and earned $962.0 million (down 20.0% year over year) in the quarter. On a sequential basis, iPod shipments and revenues plunged 56.0% and 55.0%, respectively. Revenues from iTunes/ Software/ Services improved 30.0% year over year and 12.0% sequentially to $4.11 billion. Accessories surged 15.0% from the year-ago quarter but decreased 25.0% from the previous quarter to $1.38 billion. Retail revenues in the quarter increased 19.1% year over year but declined 18.6% sequentially to $5.24 billion. At quarter end, Apple operated 402 stores worldwide, of which 151 are located outside the U.S. Greater China revenues increased 7.5% year over year and 20.2% sequentially in the reported quarter. Rest of Asia-Pacific and Japan grew 25.7% and 18.5% year over year, respectively. On a sequential basis, Rest of Asia-Pacific and Japan declined 20.8% and 29.4%, respectively. Americas grew 6.6% year over year while Europe increased 11.3% from the year-ago quarter. However, sequentially Americas plunged 30.9% and Europe fell 21.4% in the reported quarter. Margins Gross margin contracted to 37.5% from 47.4% in the year-ago quarter and met the lower end of management s guided range of 37.5% to 38.5%. On a sequential basis, gross margin declined 110 basis points (bps) in the quarter. The gross margin contraction primarily resulted from unfavorable product mix due to higher sales of lower margin iPhone 4 and 4S and iPad minis in the quarter

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Operating expenses, as a percentage of revenues, increased 60 bps year over year and 160 bps from the previous quarter to 8.7%. The rise was due to higher research & development expense (up 50 bps year over year and 70 bps sequentially) in the second quarter. Operating margin plunged to 28.8% from 39.3% reported in the year-ago quarter, reflecting lower gross margin base. On a sequential basis, operating margin contracted 280 bps to 28.8%. Net income as a percentage of revenues was 21.9% compared with 29.7% in the year-ago quarter and 24.0% in the previous quarter. Balance Sheet and Cash Flow Apple s balance sheet remains strong with cash and investments of $144.7 billion at the end of the second quarter compared with $137.1 billion in the previous quarter. Cash flow from operating activities was $12.5 billion in the reported quarter. Third Quarter Guidance For third quarter 2013, Apple forecasts revenues to be in the range of $33.5 billion to $35.5 billion. Gross margin is expected to be in the range of 36.0% to 37.0%, while operating expenses are projected to be within $3.85 to $3.95 billion range. Other income/(expense) are forecasted to be $300.0 million while the tax rate is likely to be 26%. Apple expects to open approximately 30 new stores and remodel at least 20 stores by the end of fiscal 2013. Apple expects to open 11 new stores in Greater China (currently 11 stores) over the next two years. Capital Return Program Details Apple announced significant expansion of its share repurchase activity and dividend payout by allocating $100.0 billion (up $55.0 billion from the program announced last year) for the program. The company expects to buyback shares worth $60.0 billion (up from $10.0 billion of the last year program) by the end of 2015. Apple also raised the dividend payout by 15.0% to $3.05 (up from $2.65) per share. Going forward, Apple expects to tap the U.S debt market and has already secured debt ratings from S&P and Moody s.

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VALUATION
Apple shares are trading at 10.3X TTM earnings, a premium to the peer group average of 8.9X, but a discount to S&P 500 average of 16.3X. This is at the lower end of the historical range of 10.0X to 38.1X TTM earnings, indicating strong upside potential. The stock is trading at 10.6X our forward earnings estimates for 2013, a 11.6% premium to the peer group average of 9.5X. However, the stock has traded historically at a 34.9% average premium, which seems to indicate upside from the current levels. We believe that Apple will continue to gain in the near term based on robust iPhone and iPad sales. However, increasing cyclicality in iPhone sales, margin contractions, stiff competition and continuing legal complexities makes us cautious over the long run. Thus, we remain Neutral and set a price target of $452.00 (11.2X 2013 earnings).

Key Indicators
P/E 5-Yr High (TTM) P/E 5-Yr Low (TTM)

P/E F1

P/E F2

Est. 5-Yr EPS Gr%

P/CF (TTM)

P/E (TTM)

Apple Inc. (AAPL) Industry Average S&P 500 Dell Inc. (DELL)

10.6 9.5 14.7 8.7

9.4 8.6 13.8 8.1

15.3 8.6 10.7 2.0

8.7 7.1 12.4 5.6

10.3 8.9 16.3 7.8

38.1 27.9 27.7 17.7

10.0 7.5 12.0 5.0

TTM is trailing 12 months; F1 is 2013 and F2 is 2014, CF is operating cash flow

P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE (TTM) D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA (TTM)

Apple Inc. (AAPL) Industry Average S&P 500

3.3 2.8 6.3

9.2 2.8 9.8

3.3 2.8 2.9

36.3 33.2 23.9

0.0 0.2 N/A

2.4 1.5 2.0

6.0 5.0 N/A

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Earnings Surprise and Estimate Revision History

NOTE

THIS IS A NEWS-ONLY UPDATE; THE REST OF THIS REPORT HAS NOT BEEN UPDATED YET

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OVERVIEW
Founded in 1977, Apple Inc. (AAPL) is headquartered in Cupertino, California. Formerly known as Apple Computer, Inc., the company changed its name in January 2007. Apple designs, manufactures and sells personal computers (Mac), portable digital music players (iPod) and mobile communication devices iPhone and iPad), as well as related software, services, peripherals and networking solutions, worldwide. Revenues are generated primarily from the sale of hardware, software, digital content and applications, and service and support contracts. Apple offers various software products and computer technologies including Mac operating system software, iOS mobile operating system software; server software and related solutions; professional application software; and consumer, education and business oriented application software. In October 2011, Apple launched its iCloud cloud service. The company also sells digital content and applications through its iTunes Store, App Store, iBookstore, and Mac App Store. Apple primarily reports revenue in seven categories iPhone and related products and services, Macintosh, iPad and related products and services, iPod, Other Music related products and services, Software, service and other sales, and Peripherals and other hardware.

2012 Revenue Breakdown

Macintosh iPod

2%2% 21%

15% 4% 5%

Other Music related iPhone iPad Peripherals

51% Software, service and other sales

[From first quarter 2013, Apple had changed its reporting of revenues by Products to iTunes/Software/Services and Accessories.]

iPhone, iPad, Mac, iPod,

iPhone and related products and services consist of iPhone handset sales and Apple-branded and third-party iPhone accessories sales. In fiscal 2012, the company launched iPhone 4S (October 2011) and iPhone 5 (September 2012). The company sold 1.25 billion units in fiscal 2012. Apple s tablet computer iPad continued its strong growth in fiscal 2012. In March 2012, the company introduced iPad 3, which helped Apple to sold approximately 58.3 million units in fiscal 2012. In November 2012, the company launched iPad Mini and iPad 4. Macintosh includes desktops (iMac, Mac mini, Mac Pro and Xserve) and portables (MacBook Air, MacBook Pro and MacBook). The company introduced a new MacBook Air and MacBook Pro with the popular Retina display feature (June 2012). Apple sold 18.2 million Macs in fiscal 2012. The iPod line (iPod Touch, Classic, Shuffle and Nano) consists of portable digital music players. Apple sold 35.2 million iPods in fiscal 2012.

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Other music related products and services consist of iTunes Store sales, iPod services and Applebranded and third-party iPod accessories. Software, service and other sales include sales of Applebranded operating system and application software, third-party software, AppleCare and Internet services. Peripherals and other hardware include sales of Apple-branded and third-party displays, wireless connectivity and networking solutions, and other hardware accessories including printers, storage devices, computer memory, digital video and still cameras, as well as various other computing products and supplies. Additionally, Apple offers the Apple TV set top box designed and marketed by Apple, which can store content on an internal hard drive or stream it across a network, depending on the needs of the user. Apple TV is a digital media receiver that plays digital content originating from any Mac OS X or Windows computer running iTunes on an enhanced-definition or high-definition (HD) widescreen television. No single customer accounted for more than 10.0% of revenues in 2012. As of fourth quarter 2012, the company operated 390 retail stores, of which 250 were located in the US and 140 in other international locations. Retail sales increased 33.0% year over year to $4.7 billion in fiscal 2012. Apple faces significant competition in most of its markets such as the smartphone and tablet, particularly from Asian equipment manufacturers such as HTC and Samsung. In the personal computer segment, the company also faces strong competition from Hewlett Packard and Dell. In the digital music and cloud services market, Amazon and Google are Apple s primary challengers.

REASONS TO BUY
Apple is widely recognized as a leading innovator in the consumer electronics market. The company introduced iPhone at a time when feature phones used to dominate the mobile communication market. iPhone s sleek design and features has helped the company to gain significant market share from the likes of Nokia and Research In Motion. With the introduction of iPad, Apple created the tablet market segment, where it continues to enjoy a first mover advantage despite significant competition from Google, Amazon and Samsung. We believe that Apple s significant brand equity and innovative prowess will help the company to maintain its strong customer base going forward. Apple continuously updates its product lines to drive both replacement and first-time sales. In fiscal 2012, the company updated all its major hardware product lines (MacBook Air, Pro, iPhone 4S & 5, iPad 3, iPad mini). Apple launched 128GB iPad 4 in late January 2013. On the software side, it introduced a new Mac operating system (Mountain Lion- July 2012), iOS 6 (September 2012) and iOS 6.1 (January 2013). These frequent updates drove iPhone & iPad dollar sales, which surged 71% and 59% year over year, respectively. Unit wise, iPhone and iPad sales jumped 73.0% and 80.0%, respectively in fiscal 2012. Despite a sluggish PC market, demand for Macintosh portables (up 12.0% year over year) boosted sales. We believe that frequent updates will not only help Apple to maintain its customer base, but also expand its market going forward. The iTunes Store delivered strong sales of $7.5 billion (up 39.0% year over year) in fiscal 2012, highlighting its strength in distributing digital work, such as music, video, iOS apps and books. In the first quarter of 2013, Apple s iTunes garnered $2.1 billion in revenues. Apple continues to expand iTunes content and applications in order to boost further sales going forward. Digital content sales should pick up strongly given current market trends and Apple will no doubt be a beneficiary, given its already popular online store and growing customer base. In addition, Apple s app store

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continues to witness unparalleled success with more than 775,000 apps. Currently, more than 190 million are using the new iCloud, which reflects an expanding customer base, in our view. Apple has leveraged its popularity through a network of 401 retail stores, of which 251 are located in the U.S. and 150 outside the U.S. In the first quarter of 2013, Apple opened 11 new stores, of which 10 were outside the US, clearly reflecting its focus on expanding global footprint. The company expects to open 30 new retail stores in fiscal 2013 with most of them outside the U.S. Apple continues to expand in the Asia-Pacific region, particularly in China. In the first quarter of 2013, revenue from Greater China (Greater China includes China, Hong Kong and Taiwan) was up 67.0% from the year-ago period and contributed 12.5% of total revenue. Reportedly, the company is in talks with China Mobile, the world s largest telecom carrier in terms of users, to offer iPhone in China. We believe that a partnership with China Mobile will rapidly expand Apple s market share in the region going forward. Apple s balance sheet remains strong, with zero debt and $137.1 billion in cash, short-term investments and long-term marketable securities as of Dec 2012. The company generated $23.4 billion in cash flow from operations during the first three months of fiscal 2013. The company paid dividend of $2.5 billion in Nov 2012. The company has also announced share repurchase program worth $10.0 billion. We believe that these shareholder friendly steps make the stock much more attractive. Moreover, the company s strong cash flow generation ability will not only help it to sustain the current rate, but can also boost payout ratio going forward.

REASONS TO SELL
Innovation is the primary key for Apple s long-term growth. Although the company continuous to update its existing portfolio, it has not been able to launch any new product in recent times. We believe that the untimely death of its iconic founder Mr. Steve Jobs has created a void in this regard, which may be difficult to fill going forward. We believe that Apple s portfolio will suffer from the lack of new ideas over the long term, as the window of opportunity gets narrower and markets become saturated. Although new management is taking some shareholder-friendly steps (such as the dividend payout, share buyback), we believe that all the stakeholders (investors and customers) are eagerly waiting for Apple s new innovation. This has added tremendous pressure on management and can be an overhang on the stock going forward. Increasing cyclicality of iPhone sales is a significant headwind for Apple in our view. Lately, Apple s earnings growth has been primarily driven by the strong performance of iPhone (50% of total revenue). However, iPhone product cycles have become more predictive due to Apple s policy of a yearly update. Since consumers are fully aware of the forthcoming launch, they are postponing their sales, thereby hurting revenue and profitability (as in the third quarter of 2012). Historically, iPhone sales have declined sequentially every quarter following a new iPhone release. Since the release of iPhone 4S (October 2011) in the first quarter of 2012, sales declined 5% and 26% sequentially in the second and third quarters of 2012, respectively. We believe that this cyclicality in iPhone sales will remain an overhang on the stock going forward. Apple faces significant competition in most of its operating markets. Apple s Macintosh operating system has a considerably small share of the personal computer market, which is dominated by makers of computers using Windows. Apple faces intense competition from the market leader Hewlett-Packard and the likes of Lenovo, Dell, Acer, and Asus in the PC market. In the smartphone segment, Apple has a host of large competitors such as Samsung, Google (after the acquisition of Motorola), Research in Motion, Nokia, and Sony that have launched attractive competing products,
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setting cutthroat competition for Apple. Samsung continues to lead the smartphone unit sales pack at the end of fourth quarter of 2012. On the software side, Apple s iOS continues to face significant competition from Google s Android-based mobile operating system. In the tablet market the competition for iPad is heating up, primarily from several new entrants such as Amazon, Barnes & Noble, HTC, Research In Motion and Hewlett Packard. Apple is heavily dependent on iPhone and iPad sales and the increasing competition will hurt its top-line and profitability going forward. Growth in the digital music player market has slowed down considerably as the core MP3 market becomes saturated. iPod unit shipments continued to be hurt due to cannibalization from the iPad. Apple s iTunes is seeing growing competition from Google and Amazon. In the online movie and video market, competition has been heating up for Apple in recent times. Apple TV faces tough competition from Microsoft s Xbox 360 Kinect and Zune Video, Sony Corp., Amazon and Wal-Mart, which owns Vudu. Apple remains entangled in various legal battles over its mobile and tablet products. Over the last couple of years, Apple has been highly vocal about saving its intellectual property from misuse and violations. Although Apple settled lawsuits with HTC in late 2012, the ongoing lawsuits with Samsung remain a major overhang on the stock. The company is also entangled in a legal battle with Amazon, regarding the use of the word App Store . Most recently, the company has lost a part of this lawsuit, when a U.S. District Judge ruled against Apple s false advertising allegations. The company is also facing an investigation by the Department of Justice for conspiring and manipulating e-book prices with a host of publishers. As lawsuits of this type tend to linger for a long time, we do not see any near-term challenges for Apple. However, any adverse outcome may result in a hefty penalty, which can hurt the company s profitability and make a dent in its cash pile going forward.

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DISCLOSURES & DEFINITIONS

The analysts contributing to this report do not hold any shares of AAPL. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1016 companies covered: Outperform - 15.2%, Neutral - 79.0%, Underperform 5.4%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each

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stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively.

th

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