Technology Research Group Downgrades Apple, Google
Technology Research Group, which takes a forensic accounting approach to research, has lowered its ratings on technology leaders Apple (AAPL) and Google (GOOG) following announcement of their quarterly results. TRG cites concerns about high valuation, accounting changes and earnings management. We are pleased to offer complimentary downloads from the Alacra Store of TRG’s latest reports on Apple and Google.
Selected Excerpts:
- Apple (AAPL) warrants a sizeable premium. Whether a 30 plus earnings multiple can be justified is the more relevant question. Recent developments leave us less confident. We are moving to a “Sell” rating and establishing a $197 price objective (assumes a multiple of 25 times EPS estimate). This is not a short sell recommendation. It refers to protecting profits and managing downside risk only.
- Over the last two quarters in particular, a few operational and earnings quality-related irregularities surfaced. Given the appreciation in Apple’s stock over the past year and a pricey valuation, we believe the safe play is to protect profits. Should these issues stabilize, we would reconsider our rating.
- There may be more to (Apple’s) sales backlog reduction than just accounting changes. The severity of the revision stands out. Compared to deferrals reduction (vs. F1Q09), the adjustment to F1Q10 revenue was disproportionately larger than restatements of historical quarters (FY07-FY09).
- We wouldn’t categorize (Google’s) earnings management as egregious, but there are some serious concerns. R&D expenses declined 15% Y/Y in the fourth quarter (in basis points as a % of revenue). For the year, the ratio of R&D to sales was down only 6% (12.02% vs. 12.82% in 2008). Actions in the fourth quarter were not a matter of circumstance. They were deliberately planned.
- Risk/reward is far less favorable than it used to be. We believe protecting profits is the safe play. We are moving to a “Sell” rating and establishing a $536 price target (assumes 23 times 2010 EPS estimate). Please note this is not a short sale recommendation. Stepping in front of a sell-side and institutional favorite would be a risky endeavor at this time. Things can change. We’ll be watching.
These research reports on Apple and Google have been made available for complimentary download from the Alacra store for 30 days by special arrangement with Technology Research Group, an Alacra content partner. After 30 days, the reports will revert to their regular Alacra Store price of $25 each)
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