AAPL: Is There an 'iPod Maxi' in FYQ4 View? Asks BMO - Barron's (blog)

By Tiernan Ray

The initial reaction to Apple‘s (AAPL) below-consensus fiscal Q4 view on Tuesday evening, when analysts issued reports on Wednesday, was that it was the typical Apple “conservatism” at work: issue reasonable numbers that set the company up to surprise.

In fact, some observers on Wednesday suggested the outlook was even more conservative as usual, as it was 11% below what the Street was modeling up until then on a revenue basis, 26% below consensus on a profit basis. That is steeper than the same period a year ago, when Apple forecast results 10% below on a revenue basis and 15% below on a profit basis. (Results ended up being 13% and 28% higher than Apple forecast.)

But another view has surfaced in the days since, namely that the forecast is not conservative at all, but rather ambitious, and perhaps unrealistic.

Jefferies & Co.’s Peter Misek yesterday tried to address that point of view, dismissing investor concerns by speculating that perhaps an “iPad Mini,” widely rumored for months now as a potential competitor to Google‘s (GOOG) “Nexus 7,” Amazon.com‘s (AMZN) “Kindle Fire,” and other 7-inch tablet computers, could be a surprise new product introduction as soon as this quarter.

That take may be spreading now. Keith Bachman of BMO Capital wrote last night in a note to clients that “We believe that Sept Q rev guidance is aggressive, even with an assumed healthy increase in iPads and computers Q/Q.” The forecast should have been more like $31 billion to $32 billion, he wrote, not the $34 billion Apple is modeling.

Moreover, Bachman is puzzled by Apple’s projection of gross margin of 38.5%, which seems far too low given the revenue the company is modeling: it should be 42%, he avers.

The answer, he thinks might be the iPad Mini:

We do not believe that Apple management would reach/stretch on guidance, particularly given that Tim Cook is still operating with the back drop of Steve Jobs’ legacy. Therefore, we believe that Apple will bring out a new product in the Sept Q, which would help revenues and hurt gross margins, and we think this will be positive for the stock.

Moreover, Bachman opines it might be nice if the iPad Mini turned out to be an “iPod Maxi“: “Why not scale up? Hence, the product could be called an iPod touch Maxi/Big/(opposite of Mini). This could product could be WiFi only, to help lower cost. We think this product would do well in the educational market, among others.”

You can fill in your own jokes about product names.

Bachman has an Outperform rating on Apple shares and a $680 price target.

Apple shares today are up $10.35, or 1.8%, at $585.23.