Editor’s Note: This article was originally published yesterday, after market close.
Here’s something you don’t see everyday: Apple Inc. (NASDAQ:AAPL) shares initially rallied today despite analyst pessimism, though they ultimately gave up most of those gains. In recent times, the slightest inkling of analyst skepticism has been enough to trigger relentless selling, yet today Apple bucked that trend even after Goldman Sachs Group, Inc. (NYSE:GS) trimmed its models for the Mac maker.
No conviction
Analyst Bill Shope has taken Apple Inc. (NASDAQ:AAPL) off of Goldman Sachs Group, Inc. (NYSE:GS)’s Conviction Buy list, although Apple Inc. (NASDAQ:AAPL) is still a “buy” in his book. Shope also knocked down his price target on the Mac maker from $660 to $575. Apple Inc. (NASDAQ:AAPL) wasn’t alone, as Shope has become negative on the broader tech sector, in part due to deteriorating conditions in the PC market.
Schope downgraded Hewlett-Packard Company (NYSE:HPQ) from “sell” to “neutral” on the belief that shares have gotten frothy. Hewlett-Packard Company (NYSE:HPQ) had doubled from its November lows on investor hopes that the turnaround is progressing swimmingly, but Schope has pegged just a $16 price target on the PC giant.
Apple Inc. (NASDAQ:AAPL) needs upcoming products to reinvigorate momentum, and Schope doesn’t believe the recent upgrades are driving market share gains as previously expected. The analyst acknowledges that Apple Inc. (NASDAQ:AAPL)’s business model makes its cash flows “far more resilient,” but is still becoming less optimistic.
The downgrade is peculiar for a number of reasons. Just one and a half months ago, Goldman went to bat for Apple after Tim Cook spoke at the investment bank’s Technology and Internet Conference. Schope came out with some bullish comments, reiterating its Conviction Buy rating and $660 price target right before Valentine’s Day.
A couple weeks later, Goldman dubbed Apple the most undervalued stock within its coverage universe, based on prices and price targets at the time. How much can change in less than two months? Evidently, conviction doesn’t go a long way at Goldman.
A Chinese change of heart
Instead of focusing on the Goldman trim, investors are being encouraged today by reports that Cook’s apology to Chinese consumers has immediately begun paying dividends.
Over the past couple weeks, state-controlled media outlets in China have embarked upon a smear campaign, bashing Apple’s warranty and repair policies and (inaccurately) alleging that Apple’s policies put Chinese consumers at a service disadvantage relative to their U.S. counterparts.
The Chinese government has launched smear campaigns in the past against foreign companies, and Citigroup Inc (NYSE:C) analyst Glen Yeung used HP as a proxy to estimate how much damage Apple could be facing. Back in 2010, China undermined HP in favor of local PC vendors, and HP ended up losing roughly half of their PC market share. By the same rationale, if Apple were to lose half of its China market, Yeung estimated that could amount to $13.1 billion in lost revenue.
That estimate made for some gloomy headlines yesterday that contributed to Apple’s 3% sell-off, but ultimately the figure is an incredibly broad overgeneralization. Apple’s trailing-12-month “Greater China” revenue (including retail) is currently $26.6 billion, so simply cutting that figure in half would be scary… except that Apple’s similarities to HP are only skin deep. HP is a commoditized PC vendor in a declining market, while Apple is a differentiated mobile device maker with a premium brand.
There are certainly risks related to China’s recent anti-Apple campaign, but it’s going to take a lot more than that to make $13 billion in sales disappear in an instant. That’s why it’s encouraging that the Chinese media is changing its tune following Cook’s apology. The Chinese press is now praising Apple for boosting transparency and easing the building tensions, with the Global Times calling Apple’s response “worth respect compared with other American companies.” The Foreign Ministry also nodded in approval.
The change of heart in China is one reason why investors are overlooking Goldman’s cut today.
The article Why Apple Initially Rallied Despite a Goldman Cut originally appeared on Fool.com.
Fool contributor Evan Niu, CFA, owns shares of Apple. The Motley Fool recommends Apple and Goldman Sachs. The Motley Fool owns shares of Apple and Citigroup Inc (NYSE:C).
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