Documents
Resources
Learning Center
Upload
Plans & pricing Sign in
Sign Out

Goldman-Sachs-AAPL-1-17-11

VIEWS: 12,897 PAGES: 10

									      January 17, 2011




      COMPANY UPDATE
      Apple Inc. (AAPL)
      Buy                                                                                                                                          Equity Research

      Steve Jobs to take medical leave, remains CEO
      What's changed                                                                         Investment Profile

      On Monday morning, Apple released an internal email from Steve Jobs                    Low                                                                             High

      where he noted that the board had granted him medical leave from the                   Growth                                                                          Growth

                                                                                             Returns *                                                                       Returns *
      company to focus on his health. Mr. Jobs will remain CEO and he will
                                                                                             Multiple                                                                        Multiple
      continue to be involved in major strategic decisions for the company. He               Volatility                                                                      Volatility
      also noted he hopes to be back at Apple full time as soon as possible.                      Percentile           20th       40th        60th        80th        100th

      Meanwhile, Tim Cook, Apple’s Chief Operating Officer, will be responsible                  Apple Inc. (AAPL)

      for day to day management of the company in Mr. Jobs’ absence.                             Americas Technology Peer Group Average
                                                                                           * Returns = Return on Capital For a complete description of the
                                                                                                                         investment profile measures please refer to
                                                                                                                         the disclosure section of this document.
      Implications
      While the stock is likely to face near-term pressure, we believe the long-           Key data                                                                             Current
      term fundamentals remain intact and we would reiterate our Conviction                Price ($)                                                                             348.48
                                                                                           12 month price target ($)                                                             430.00
      Buy on any weakness. This is based on the following key points we detail             Market cap ($ mn)                                                                   319,197.2
                                                                                           Dividend yield (%)                                                                       NM
      in this note: 1) The management team remains strong, and we believe                  Net margin (%)                                                                           20.7
      investors would embrace Tim Cook in any potential succession plan; 2)                Debt/total capital (%)                                                                    0.0

      Apple’s $51 billion in cash and investments could be partially distributed
                                                                                                                                   9/10             9/11E           9/12E         9/13E
      to shareholders to stabilize the shares; 3) The multiple of 15.1X already            Revenue ($ mn)                      65,225.1           94,622.5       116,726.1     129,063.0
      represents a significant historical discount, and we see no direct risk to           EPS ($)                                15.15              20.88           27.09         30.26
                                                                                           P/E (X)                                 23.0               16.7            12.9          11.5
      earnings from this move. As a result, we are reiterating our CL-Buy on               EV/EBITDA (X)                           10.2               11.2             8.6           7.6
      Apple and our 12-month target price of $430.                                         ROE (%)                                 35.3               33.6            31.3          26.2

                                                                                                                                    9/10           12/10E           3/11E           6/11E
                                                                                           EPS ($)                                  4.64              5.41            4.49            4.56
      Valuation
      Our target price represents a 19X P/E multiple on our above-consensus                Price performance chart
      CY2010 EPS estimate or a 19% discount to Apple’ five-year average                    360                                                                                       1,450
      multiple of 23X.                                                                     340                                                                                       1,400
                                                                                           320                                                                                       1,350
                                                                                           300                                                                                       1,300
      Key risks                                                                            280                                                                                       1,250
                                                                                           260                                                                                       1,200
      The key risks to our target include: macro deterioration, increased platform         240                                                                                       1,150
      competition, potential legal and regulatory restrictions, and uncertain              220                                                                                       1,100
                                                                                           200                                                                                       1,050
      management succession plans.
                                                                                           180                                                                                       1,000
                                                                                             Jan-10               Apr-10                 Jul-10              Oct-10


                                                                                                                           Apple Inc. (L)          S&P 500 (R)


      INVESTMENT LIST MEMBERSHIP                                                           Share price performance (%)                        3 month            6 month 12 month
      Americas Buy List                                                                    Absolute                                               15.3               37.9     66.4
      Americas Conviction Buy List                                                         Rel. to S&P 500                                         4.6               16.8     47.8
                                                                                           Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 1/14/2011 close.


      Coverage View: Neutral

      Bill Shope, CFA                                                The Goldman Sachs Group, Inc. does and seeks to do business with
      (212) 902-6834 bill.shope@gs.com Goldman Sachs & Co.           companies covered in its research reports. As a result, investors should
      Elizabeth Borbolla                                             be aware that the firm may have a conflict of interest that could affect
      (212) 357-4977 elizabeth.borbolla@gs.com Goldman Sachs & Co.   the objectivity of this report. Investors should consider this report as
      Cristina Colon, CMA                                            only a single factor in making their investment decision. For Reg AC
      (212) 902-9913 cristina.colon@gs.com Goldman Sachs & Co.       certification, see the end of the text. Other important disclosures follow
      Stephen Oshman                                                 the Reg AC certification, or go to www.gs.com/research/hedge.html.
      (917) 343-3128 stephen.oshman@gs.com Goldman Sachs & Co.       Analysts employed by non-US affiliates are not registered/qualified as
                                                                     research analysts with FINRA in the U.S.

Click here to see what Steve Jobs' medical leave means for Apple (AAPL) Investors
      The Goldman Sachs Group, Inc.                                                                                                               Global Investment Research
 January 17, 2011                                                                                                                                                              Apple Inc. (AAPL)




 Apple Inc.: Summary Financials
Profit model ($ mn)                        9/10         9/11E         9/12E         9/13E     Balance sheet ($ mn)                                  9/10           9/11E       9/12E       9/13E


Total revenue                          65,225.1       94,622.5    116,726.1     129,063.0     Cash & equivalents                                11,261.0         13,811.8    16,612.6    19,231.2
Cost of goods sold                   (39,541.0)     (58,306.9)    (69,795.3)    (76,109.6)    Accounts receivable                                5,510.0          7,566.0     8,679.7     9,695.9
SG&A                                  (5,517.0)      (7,775.1)     (9,247.1)    (10,495.9)    Inventory                                          1,051.0          1,397.9     1,584.9     1,732.7
R&D                                   (1,782.0)      (2,478.9)     (3,125.1)     (3,239.7)    Other current assets                               9,497.0         12,150.9    13,559.5    14,722.3
Other operating profit/(expense)             0.0           0.0           0.0           0.0    Total current assets                              27,319.0         34,926.6    40,436.7    45,382.1
ESO expense                                    --            --            --            --   Net PP&E                                           4,768.0          9,205.3    12,303.3    15,059.6
EBITDA                                 19,412.1       27,575.5      36,426.1      41,282.8    Net intangibles                                        0.0              0.0         0.0         0.0
Depreciation & amortization           (1,027.0)      (1,514.0)     (1,867.6)     (2,065.0)    Total investments                                 39,750.0         59,394.7    85,582.4   116,168.1
EBIT                                   18,385.1       26,061.5      34,558.5      39,217.8    Other long-term assets                             3,346.0          4,130.0     5,097.8     6,292.3
Net interest income/(expense)             155.0          260.0         260.0         260.0    Total assets                                      75,183.0        107,656.7   143,420.2   182,902.1
Income/(loss) from associates                0.0           0.0           0.0           0.0
Others                                       0.0           0.0           0.0           0.0    Accounts payable                                  12,015.0         15,625.6    17,716.3    19,368.0
Pretax profits                         18,540.1       26,321.5      34,818.5      39,477.8    Short-term debt                                        0.0              0.0         0.0         0.0
Provision for taxes                   (4,527.0)      (6,712.0)     (8,878.7)    (10,066.8)    Other current liabilities                          8,707.0         11,032.4    12,670.7    14,450.8
Minority interest                            0.0           0.0           0.0           0.0    Total current liabilities                         20,722.0         26,658.0    30,387.0    33,818.8
Net income pre-preferred dividends     14,013.1       19,609.6      25,939.8      29,410.9    Long-term debt                                         0.0              0.0         0.0         0.0
Preferred dividends                          0.0           0.0           0.0           0.0    Other long-term liabilities                        6,670.0         11,998.1    16,492.9    21,532.0
Net income (pre-exceptionals)          14,013.1       19,609.6      25,939.8      29,410.9    Total long-term liabilities                        6,670.0         11,998.1    16,492.9    21,532.0
Post tax exceptionals                      (0.1)           0.0           0.0           0.0    Total liabilities                                 27,392.0         38,656.1    46,879.9    55,350.8
Net income (post-exceptionals)         14,013.0       19,609.6      25,939.8      29,410.9
                                                                                              Preferred shares                                       0.0              0.0         0.0         0.0
EPS (basic, pre-except) ($)               15.41         21.21         27.51         30.73     Total common equity                               47,791.0         69,000.6    96,540.3   127,551.3
EPS (diluted, pre-except) ($)             15.15         20.88         27.09         30.26     Minority interest                                      0.0              0.0         0.0         0.0
EPS (basic, post-except) ($)              15.41         21.21         27.51         30.73
EPS (diluted, post-except) ($)            15.15         20.88         27.09         30.26     Total liabilities & equity                        75,183.0        107,656.7   143,420.2   182,902.1
Common dividends paid                         --            --            --            --
DPS ($)                                    0.00          0.00          0.00          0.00
Dividend payout ratio (%)                   0.0           0.0           0.0           0.0     Additional financials                                 9/10           9/11E       9/12E       9/13E
                                                                                              Net debt/equity (%)                                  (23.6)          (20.0)      (17.2)      (15.1)
                                                                                              Interest cover (X)                                     NM              NM          NM          NM
Growth & margins (%)                       9/10         9/11E         9/12E         9/13E     Inventory days                                          7.0             7.7         7.8         8.0
Sales growth                               52.0          45.1           23.4         10.6     Receivable days                                        24.8            25.2        25.4        26.0
EBITDA growth                              55.6          42.1           32.1         13.3     BVPS ($)                                             52.18           74.04      101.45      132.39
EBIT growth                                56.6          41.8           32.6         13.5
Net income (pre-except) growth             70.2          39.9           32.3         13.4     ROA (%)                                                22.8            21.4        20.7        18.0
EPS growth                                 67.1          37.6           29.7         11.7     CROCI (%)                                              46.4            42.5        36.8        29.8
Gross margin                               39.4           38.4          40.2          41.0
EBITDA margin                              29.8          29.1           31.2         32.0     Dupont ROE (%)                                         29.3            28.4        26.9        23.1
EBIT margin                                28.2           27.5          29.6         30.4     Margin (%)                                             21.5            20.7        22.2        22.8
                                                                                              Turnover (X)                                            0.9             0.9         0.8         0.7
Cash flow statement ($ mn)                9/10         9/11E         9/12E         9/13E      Leverage (X)                                            1.6             1.6         1.5         1.4
Net income                            14,013.1       19,609.6      25,939.8      29,410.9
D&A add-back (incl. ESO)               1,027.0        1,514.0       1,867.6       2,065.0     Free cash flow per share ($)                         18.24           22.28       29.05       33.02
Minority interest add-back                 0.0            0.0           0.0           0.0     Free cash flow yield (%)                               7.9             6.4         8.3         9.5
Net (inc)/dec working capital          1,249.0          879.2       1,019.7       1,105.1
Other operating cash flow              2,305.9        2,756.2       2,997.0       3,153.3
Cash flow from operations             18,595.0       24,758.9      31,824.0      35,734.3

Capital expenditures                  (2,005.0)      (4,163.4)     (4,435.6)     (4,130.0)
Acquisitions                            (754.0)            0.0           0.0           0.0
Divestitures                                0.0            0.0           0.0           0.0
Others                               (11,095.0)     (19,644.7)    (26,187.7)    (30,585.7)
Cash flow from investing             (13,854.0)     (23,808.1)    (30,623.3)    (34,715.7)

Dividends paid (common & pref)              0.0           0.0           0.0           0.0
Inc/(dec) in debt                           0.0           0.0           0.0           0.0
Other financing cash flows              1,257.0       1,600.0       1,600.0       1,600.0
Cash flow from financing                1,257.0       1,600.0       1,600.0       1,600.0
Total cash flow                         5,998.0       2,550.8       2,800.8       2,618.6
                                                                                              Note: Last actual year may include reported and estimated data.
                                                                                              Source: Company data, Goldman Sachs Research estimates.




 Analyst Contributors

 Bill Shope, CFA                              Stephen Oshman
 bill.shope@gs.com                            stephen.oshman@gs.com

 Elizabeth Borbolla
 elizabeth.borbolla@gs.com

 Cristina Colon, CMA
 cristina.colon@gs.com


 Goldman Sachs Global Investment Research                                                                                                                                                           2
January 17, 2011                                                                                                 Apple Inc. (AAPL)



Overview
                                 On Monday morning, Apple released an internal email from Steve Jobs where he noted
                                 that the board had granted him medical leave from the company to focus on his health.
                                 Mr. Jobs will remain CEO and he will continue to be involved in major strategic decisions
                                 for the company. He also noted he hopes to be back at Apple full time as soon as possible.
                                 Meanwhile, Tim Cook, Apple’s Chief Operating Officer, will be responsible for day to day
                                 management of the company in Mr. Jobs’ absence. This email was similar to the letter
                                 released on January 14, 2009 ahead of Mr. Jobs prior leave of absence, though that letter
                                 specified June 2009 as his time of return, while this one does not specify a return time
                                 frame.

                                 Our take on this news is that while we will likely face near-term pressure on the stock
                                 price (downside potentially approaching 5-10%, in line with similar past announcements
                                 as discussed further in this note), we believe the long-term fundamentals remain intact
                                 and we would reiterate our Conviction Buy on any weakness. This is based on the
                                 following key points that we detail in this note:

                                      1.   The management team remains strong, and we believe investors would
                                           embrace Tim Cook in any potential succession plan. Unlike other CEO
                                           changes, we would expect no change in strategy under Tim Cook, and we would
                                           note that we believe many investors became comfortable with Tim Cook as the
                                           permanent CEO during Jobs’ 2009 medical leave. Furthermore, we believe the
                                           revolutionary implementation of Apple’s mobile computing platform is now
                                           complete, and Tim Cook appears more than qualified to shepherd this platform
                                           approach into the future.

                                      2.   Apple’s $51 billion in cash and investments could be partially
                                           distributed to shareholders to stabilize the shares. Apple’s significant cash
                                           and investments could be distributed to shareholders in the event that Steve Jobs
                                           decides not to return to Apple full-time. We believe this represents an attractive
                                           stock-stabilization option for the company, and we believe this could mitigate
                                           downside pressure on the stock from Monday’s news. Although it is not clear the
                                           management team or board would have a different view on cash usage in the event
                                           of Mr. Jobs’ departure, we believe the company’s healthy balance sheet and array of
                                           cash distribution options should add some comfort for longer-term investors.

                                      3.   The multiple of 15.1X already represents a significant historical
                                           discount, and we see no direct risk to earnings from this news. Apple is
                                           currently trading at a 34% discount to its five-year average multiple. We do not
                                           expect the news of Mr. Jobs’ medical leave to impact the earnings trajectory, so
                                           we believe this historically depressed multiple also provides some support for
                                           the stock and could attract new, value-sensitive investors if near-term selling
                                           pressure is intense.

                                 In addition to these factors, we would note that similar to prior announcements in 2004
                                 and 2009, Mr. Jobs has shown a willingness to return as CEO once his medical conditions
                                 are resolved. While we have no incremental details on the nature of Mr. Jobs’ health at
                                 this time and we do not have the expertise to discuss any prognosis, we stress that
                                 avoiding Apple’s stock on these health-related news events has been a mistake in the past.
                                 With the maturity of the platform, Tim Cook’s management skills, the current valuation,
                                 and the company’s hefty cash balance, we suspect this is once again the case.

                                 As a result, we are reiterating our CL-Buy on Apple and our 12-month target price of $430.
                                 Our target price represents a 19X P/E multiple on our above-consensus CY2010 EPS
                                 estimate or a 19% discount to Apple’ five-year average multiple of 23X. We would buy the
                                 shares on weakness, and we believe the bevy of product releases in 1H11 and continued
                                 earnings and cash flow momentum will serve as key catalysts for the stock.



Goldman Sachs Global Investment Research                                                                                         3
    January 17, 2011                                                                                               Apple Inc. (AAPL)



    Exploring the immediate impact to the stock
                                     We expect this announcement to have a negative impact on the stock near term
  Click here to see                  (potentially 5-10%, in line with prior medical leaves for Mr. Jobs), but we would note that
 what Steve Jobs'                    avoiding the stock on health-related news events has been a mistake in the past. In fact,
                                     looking at the past two health-related announcements shows that Apple stock traded
medical leave means                  down the day of the announcement and in the week after (within a 5-10% range).
                                     Nevertheless, by one month following the announcement, the stock had recovered from
 for Apple (AAPL)                    these losses. Within a year, the stock had more than doubled on both occasions. While we
      Investors                      are not calling for the stock to double in the next 12 months, we would note that Apple’s
                                     software and content platform is more developed now than at any time in the past and
                                     the company has several product announcements that could act as positive catalysts for
                                     the stock in coming months.



                                     The 2004 Announcement
                                     On Sunday, August 1, 2004, Steve Jobs sent an email to employees stating that he had
                                     successfully undergone surgery over the weekend to remove a cancerous tumor in his
                                     pancreas. He said that he expected to be back to work the following month and that Tim
                                     Cook, then Apple’s executive vice president, head of sales and operations and the Mac
                                     unit, would be responsible for day to day operations. When Apple stock opened for
                                     trading the next day, it was down 3.5% from the prior Friday’s close. The stock recouped
                                     some of these initial losses, and ended the day down 2.4%, versus a 0.4% gain in the
                                     S&P 500. Within a week of the news, the stock had declined 7.9%, compared with a 3.4%
                                     loss in the S&P 500. Nevertheless, by the end of August, Apple’s stock had risen 6.6%
                                     from levels prior to the announcement, versus a 0.2% gain the S&P 500. Within a year, the
                                     stock had risen 164.4% compared with a 12.1% gain in the S&P 500.




    Exhibit 1: AAPL underperformed in the day and week                 Exhibit 2: …But had recouped within a month and more
    following the August 1, 2004 announcement…                         than doubled within a year
    One-day and one-week stock price return                            One-month and one-year stock price return


        1%             S&P 500 +0.4%                                      180%                               AAPL +164.4%
        0%                                                                160%
       -1%                                                                140%
       -2%                                      S&P 500 -3.4%             120%
       -3%                                                                100%
       -4%                                                                 80%            AAPL +6.6%
                   AAPL -2.4%
       -5%                                                                 60%
       -6%                                                                 40%                                      S&P 500
                                                                                                S&P 500
       -7%                                                                 20%                                       +12.1%
                                                                                                 +0.2%
       -8%                                                                  0%
       -9%                                     AAPL -7.9%                 -20%




                            AAPL               SPX
                                                                                               AAPL        SPX

    Source: FactSet.                                                   Source: FactSet.




    Goldman Sachs Global Investment Research                                                                                       4
January 17, 2011                                                                                                                                    Apple Inc. (AAPL)


                                                      The 2009 Announcement
                                                      On January 14, 2009, Steve Jobs once again turned over day-to-day operations to Tim
                                                      Cook stating that his health problems were more complex than originally thought. He
                                                      noted that he would remain involved in major strategic decisions and looked forward to
                                                      returning in the summer. Importantly, the news prior to this announcement led many
                                                      investors to expect such a problem was imminent. In December 2008, Mr. Jobs
                                                      announced that he would not give his usual speech at Macworld, which led to concerns
                                                      over his health. Widespread speculation led Mr. Jobs to issue a statement on January 5
                                                      that he was suffering from a hormone imbalance, which was ultimately followed by the
                                                      January 14 announcement. The stock performance during these announcements was
                                                      confounded by the market collapse and ensuing recovery and followed months of
                                                      widespread and unfortunate speculation regarding Mr. Jobs’ health. Nevertheless,
                                                      looking at the official announcement on January 14, Apple stock declined 2.7% versus a
                                                      3.3% decline in the S&P 500 (but it declined up to 10% prior to the opening of trading).
                                                      Within a week, Apple had fallen by 5.6%, as compared with a 3.6% decline in the market.
                                                      Despite the initial reaction, the stock had recovered by 13.1% within a month and
                                                      increased by 138.8% within a year, versus gains of 5.2% and 31.7% for the S&P 500.




Exhibit 3: AAPL declined in the day and week following                                                  Exhibit 4: …But had recouped within a month and more
the January 14, 2009 announcement…                                                                      than doubled within a year
One-day and one-week stock price return                                                                 One-month and one-year stock price return


    0%                                                                                                     160%
                                                                                                                                              AAPL +138.8%
                                                                                                           140%
   -1%
                                                                                                           120%
   -2%                           AAPL -2.7%                                                                100%
                                                                                                            80%            AAPL +13.1%
   -3%                                                                    S&P 500 -3.6%                     60%                                     S&P 500
   -4%                                                                                                      40%                                      31.7%
              S&P 500                                                                                                         S&P 500 +5.2%
               -3.3%                                                                                        20%
   -5%
                                                                                                             0%
   -6%                                                      AAPL -5.6%                                     -20%
             1/13/09

                       1/14/09

                                  1/15/09

                                            1/16/09

                                                      1/17/09

                                                                1/18/09

                                                                          1/19/09

                                                                                    1/20/09

                                                                                              1/21/09




                                     AAPL                        SPX                                                           AAPL        SPX

Source: FactSet.                                                                                        Source: FactSet.




                                                      Despite the recovery of the Apple’s stock to Mr. Jobs’ past leaves of absence, it is
                                                      important to consider the impact if Mr. Jobs decides not to return to the company. As we
                                                      have seen with the departure of other successful CEOs in the industry, the stock reaction
                                                      could be quite different. When we look at eight examples (VIA.B, DELL, IBM, NTAP, ATT,
                                                      EBAY, FDC, ADBE) of when a successful technology CEO or media CEO was replaced by a
                                                      new leader, the stock often languished in the period following the transition. As we show
                                                      in Exhibit 5, these transitions have been followed by an average stock price decline of
                                                      10.6% in the 12 months following the leadership change (including Microsoft’s and EMC’s
                                                      CEO transitions before the collapse of the tech bubble, the average return is negative
                                                      22.2%). In Apple’s case, the stock price reaction could be more serious given the iconic



Goldman Sachs Global Investment Research                                                                                                                           5
January 17, 2011                                                                                                      Apple Inc. (AAPL)


                                     nature of Mr. Jobs, but this is partly mitigated by the fact that Tim Cook is already a
                                     known quantity for investors.


Exhibit 5: The average technology and media stock languished in the 12 months following the departure of a
successful CEO
12-month price performance following a CEO transition

  120.0%

  100.0%
                                 Average one year
    80.0%                        return: -10.6%

    60.0%

    40.0%

    20.0%

     0.0%

   -20.0%

   -40.0%

   -60.0%

   -80.0%

                   VIA.B            DELL         IBM         NTAP          ATT         EBAY          FDC         ADBE


Source: Goldman Sachs Research, FactSet.




How does this impact the longer-term view?
                                     As we noted in our initiation report last month (Resuming coverage with CL-Buy: platform
                                     opportunity still nascent, published December 12, 2010), we noted the substantial
                                     appreciation in Apple’s stock price and its end market dominance over the past decade
                                     has led investors to understandably attach significant value to the leadership of Steve
                                     Jobs and his team. As such, we understand that the knee-jerk reaction to Monday’s news
                                     will likely pressure the shares as many investors sell first and ask questions later. Indeed,
                                     we do not believe it is unfair to credit Steve Jobs with having a remarkable ability to see
                                     the shifting tides of consumer computing earlier than other technology leaders, and he
                                     was able to capitalize on this by pushing Apple to develop one of the most powerful
                                     software and digital content platforms in the world. With that said, this platform is now in
                                     place and it is robust. With an iOS installed base approaching 180 million users in 2011,
                                     Apple has already sold nearly 10 billion apps, over 10 billion iTunes songs, and the
                                     company now has platform-centric hardware devices addressing nearly all the major
                                     price bands and form factors of the personal compute and content markets. As such,
                                     while we would prefer to see Mr. Jobs retain the CEO slot for many years to come, we
                                     firmly believe the current bench is more than capable of managing this platform into the
                                     future – particularly under the leadership of Tim Cook.

                                     Furthermore, we don’t believe Steve Jobs’ leave of absence will have any material impact
                                     on the company’s earnings trajectory for 2011 or 2012. As such, we are currently dealing
                                     with a 15.1X P/E on our 2011 estimate, which represents a 34% discount to the company’s
                                     five-year average. More important, as investors begin to value the stock off of 2012


Goldman Sachs Global Investment Research                                                                                             6
January 17, 2011                                                                                              Apple Inc. (AAPL)


                                 earnings, the current P/E approaches 12.5X. We believe this multiple is very low for a
                                 company with such significant cash flow and earnings expansion prospects. As such, we
                                 believe longer-term investors are likely to capitalize on any near-term weakness in the
                                 share price in short order.




The use of cash question becomes even more important
                                 As of the September quarter, Apple had $51 billion in cash and marketable securities
                                 ($25.4 billion are classified as long-term investments), and we estimate this could exceed
                                 $70 billion by the end of FY2011. The company has not distributed this cash, through
                                 dividend or share repurchase, for the past ten years, and we believe this has been a
                                 source of frustration for investors. Nevertheless, if it became apparent that Steve Jobs
                                 was not going to return as permanent CEO, we believe the company would have the
                                 option of stabilizing the share price with a one-time dividend or share repurchase.
                                 Although it is not clear the management team or board would have a different view on
                                 cash usage in the event of Mr. Jobs’ departure, we believe the company’s healthy balance
                                 sheet and array of cash distribution options should add some comfort for longer-term
                                 investors.




Governance issues
                                 From a corporate governance standpoint, we foresee several repercussions from the
                                 Apple announcement. First, we expect we will see heightened discussion pushing Apple
                                 for an official succession plan. Second, we also anticipate a debate emerging over
                                 whether the board should discuss the nature of Mr. Jobs’ current health condition. This
                                 decision pivots on a fine balance between personal privacy (for Mr. Jobs) and the
                                 disclosure responsibilities of a public company. We suspect Apple will determine that
                                 privacy is the greater of the two and we will not get official details.

                                 Nevertheless, we may get a detailed succession plan, with Mr. Cook named as successor
                                 and another key figure as Chief Technologist or some other strategy-focused position.
                                 The latter role would likely be filled by an internal candidate, and possible candidates
                                 include Bertrand Serlet (SVP, Software Engineering) or Scott Forstall (SVP of iPhone
                                 Software).




Goldman Sachs Global Investment Research                                                                                      7
January 17, 2011                                                                                                                            Apple Inc. (AAPL)



Reg AC
I, Bill Shope, CFA, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or
companies and its or their securities. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specific
recommendations or views expressed in this report.




Investment Profile
The Goldman Sachs Investment Profile provides investment context for a security by comparing key attributes of that security to its peer group and
market. The four key attributes depicted are: growth, returns, multiple and volatility. Growth, returns and multiple are indexed based on composites
of several methodologies to determine the stocks percentile ranking within the region's coverage universe.
The precise calculation of each metric may vary depending on the fiscal year, industry and region but the standard approach is as follows:
Growth is a composite of next year's estimate over current year's estimate, e.g. EPS, EBITDA, Revenue. Return is a year one prospective aggregate
of various return on capital measures, e.g. CROCI, ROACE, and ROE. Multiple is a composite of one-year forward valuation ratios, e.g. P/E, dividend
yield, EV/FCF, EV/EBITDA, EV/DACF, Price/Book. Volatility is measured as trailing twelve-month volatility adjusted for dividends.




Quantum
Quantum is Goldman Sachs' proprietary database providing access to detailed financial statement histories, forecasts and ratios. It can be used for
in-depth analysis of a single company, or to make comparisons between companies in different sectors and markets.




Disclosures

Coverage group(s) of stocks by primary analyst(s)
Bill Shope, CFA: America-IT Hardware/Systems.
America-IT Hardware/Systems: Apple Inc., Dell Inc., EMC Corporation, Hewlett-Packard Co., International Business Machines, Lexmark International
Group, NetApp, Inc., Seagate Technology, Western Digital Corp., Xerox Corp..

Company-specific regulatory disclosures
The following disclosures relate to relationships between The Goldman Sachs Group, Inc. (with its affiliates, "Goldman Sachs") and companies
covered by the Global Investment Research Division of Goldman Sachs and referred to in this research.
Goldman Sachs has received compensation for investment banking services in the past 12 months: Apple Inc. ($348.48)
Goldman Sachs expects to receive or intends to seek compensation for investment banking services in the next 3 months: Apple Inc. ($348.48)
Goldman Sachs has received compensation for non-investment banking services during the past 12 months: Apple Inc. ($348.48)
Goldman Sachs had an investment banking services client relationship during the past 12 months with: Apple Inc. ($348.48)
Goldman Sachs had a non-investment banking securities-related services client relationship during the past 12 months with: Apple Inc. ($348.48)
Goldman Sachs had a non-securities services client relationship during the past 12 months with: Apple Inc. ($348.48)
Goldman Sachs makes a market in the securities or derivatives thereof: Apple Inc. ($348.48)
Goldman Sachs is a specialist in the relevant securities and will at any given time have an inventory position, "long" or "short," and may be on the
opposite side of orders executed on the relevant exchange: Apple Inc. ($348.48)

Distribution of ratings/investment banking relationships
Goldman Sachs Investment Research global coverage universe
                            Rating Distribution                            Investment Banking Relationships
                    Buy              Hold             Sell                  Buy             Hold             Sell
   Global           31%            54%             15%                  50%             42%          37%
As of January 1, 2011, Goldman Sachs Global Investment Research had investment ratings on 3,137 equity securities. Goldman Sachs assigns
stocks as Buys and Sells on various regional Investment Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Hold
and Sell for the purposes of the above disclosure required by NASD/NYSE rules. See 'Ratings, Coverage groups and views and related definitions'
below.




Goldman Sachs Global Investment Research                                                                                                                    8
January 17, 2011                                                                                                                            Apple Inc. (AAPL)



Price target and rating history chart(s)
      Apple Inc. (AAPL)                                                                       Stock Price Currency : U.S. Dollar
                                        Goldman Sachs rating and stock price target history
       500                                                                                                                 1,600
                         185     200   125
                                                                   175              240
       400                             110                                                                                 1,400
                                                                 160               230                              430
                                                                          210                 270
                                                               145                220
       300220                                 105                        195                                               1,200
                                                         130
                                             115
                                                        125
       200                                                                                                                 1,000

       100                 220                                                                                             800
                   175
               0                                                                                                           600
                                               Dec 14                                                Jun 10
 Stock Price




                                                                                                                              Index Price
                             B                           N                     CS
                    F MA M J J A S O N D J F MA M J J A S O N D J F MA M J J A S O N D
                            2008                   2009                   2010
          Source: Goldman Sachs Investment Research for ratings and price targets; FactSet closing prices as of 12/31/2010.
                                                     Rating                          Covered by Bill Shope, CFA,
            Dec 12, 2010 to B from CS
                                                     Price target                    as of Dec 12, 2010

                                                        Price target at removal           Not covered by current analyst
                                                        S&P 500


 The price targets show n should be considered in the context of all prior published Goldman Sachs research, w hich may or
 may not have included price targets, as w ell as developments relating to the company, its industry and f inancial markets.




Regulatory disclosures

Disclosures required by United States laws and regulations
See company-specific regulatory disclosures above for any of the following disclosures required as to companies referred to in this report: manager
or co-manager in a pending transaction; 1% or other ownership; compensation for certain services; types of client relationships; managed/co-
managed public offerings in prior periods; directorships; for equity securities, market making and/or specialist role. Goldman Sachs usually makes a
market in fixed income securities of issuers discussed in this report and usually deals as a principal in these securities.
The following are additional required disclosures: Ownership and material conflicts of interest: Goldman Sachs policy prohibits its analysts,
professionals reporting to analysts and members of their households from owning securities of any company in the analyst's area of coverage.
Analyst compensation: Analysts are paid in part based on the profitability of Goldman Sachs, which includes investment banking revenues.
Analyst as officer or director: Goldman Sachs policy prohibits its analysts, persons reporting to analysts or members of their households from
serving as an officer, director, advisory board member or employee of any company in the analyst's area of coverage. Non-U.S. Analysts: Non-U.S.
analysts may not be associated persons of Goldman Sachs & Co. and therefore may not be subject to NASD Rule 2711/NYSE Rules 472 restrictions
on communications with subject company, public appearances and trading securities held by the analysts.
Distribution of ratings: See the distribution of ratings disclosure above. Price chart: See the price chart, with changes of ratings and price targets
in prior periods, above, or, if electronic format or if with respect to multiple companies which are the subject of this report, on the Goldman Sachs
website at http://www.gs.com/research/hedge.html.

Additional disclosures required under the laws and regulations of jurisdictions other than the United
States
The following disclosures are those required by the jurisdiction indicated, except to the extent already made above pursuant to United States laws
and regulations. Australia: This research, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian
Corporations Act. Canada: Goldman Sachs & Co. has approved of, and agreed to take responsibility for, this research in Canada if and to the extent
it relates to equity securities of Canadian issuers. Analysts may conduct site visits but are prohibited from accepting payment or reimbursement by
the company of travel expenses for such visits. Hong Kong: Further information on the securities of covered companies referred to in this research
may be obtained on request from Goldman Sachs (Asia) L.L.C. India: Further information on the subject company or companies referred to in this
research may be obtained from Goldman Sachs (India) Securities Private Limited; Japan: See below. Korea: Further information on the subject
company or companies referred to in this research may be obtained from Goldman Sachs (Asia) L.L.C., Seoul Branch. Russia: Research reports
distributed in the Russian Federation are not advertising as defined in the Russian legislation, but are information and analysis not having product
promotion as their main purpose and do not provide appraisal within the meaning of the Russian legislation on appraisal activity. Singapore:
Further information on the covered companies referred to in this research may be obtained from Goldman Sachs (Singapore) Pte. (Company
Number: 198602165W). Taiwan: This material is for reference only and must not be reprinted without permission. Investors should carefully
consider their own investment risk. Investment results are the responsibility of the individual investor. United Kingdom: Persons who would be
categorized as retail clients in the United Kingdom, as such term is defined in the rules of the Financial Services Authority, should read this research
in conjunction with prior Goldman Sachs research on the covered companies referred to herein and should refer to the risk warnings that have
been sent to them by Goldman Sachs International. A copy of these risks warnings, and a glossary of certain financial terms used in this report, are
available from Goldman Sachs International on request.
European Union: Disclosure information in relation to Article 4 (1) (d) and Article 6 (2) of the European Commission Directive 2003/126/EC is
available at http://www.gs.com/client_services/global_investment_research/europeanpolicy.html which states the European Policy for Managing
Conflicts of Interest in Connection with Investment Research.
Japan: Goldman Sachs Japan Co., Ltd. is a Financial Instrument Dealer under the Financial Instrument and Exchange Law, registered with the
Kanto Financial Bureau (Registration No. 69), and is a member of Japan Securities Dealers Association (JSDA) and Financial Futures Association of
Japan (FFAJ). Sales and purchase of equities are subject to commission pre-determined with clients plus consumption tax. See company-specific
disclosures as to any applicable disclosures required by Japanese stock exchanges, the Japanese Securities Dealers Association or the Japanese
Securities Finance Company.

Ratings, coverage groups and views and related definitions
Buy (B), Neutral (N), Sell (S) -Analysts recommend stocks as Buys or Sells for inclusion on various regional Investment Lists. Being assigned a Buy
or Sell on an Investment List is determined by a stock's return potential relative to its coverage group as described below. Any stock not assigned
as a Buy or a Sell on an Investment List is deemed Neutral. Each regional Investment Review Committee manages various regional Investment
Lists to a global guideline of 25%-35% of stocks as Buy and 10%-15% of stocks as Sell; however, the distribution of Buys and Sells in any particular
coverage group may vary as determined by the regional Investment Review Committee. Regional Conviction Buy and Sell lists represent
investment recommendations focused on either the size of the potential return or the likelihood of the realization of the return.




Goldman Sachs Global Investment Research                                                                                                                   9
January 17, 2011                                                                                                                          Apple Inc. (AAPL)


Return potential represents the price differential between the current share price and the price target expected during the time horizon associated
with the price target. Price targets are required for all covered stocks. The return potential, price target and associated time horizon are stated in
each report adding or reiterating an Investment List membership.
Coverage groups and views: A list of all stocks in each coverage group is available by primary analyst, stock and coverage group at
http://www.gs.com/research/hedge.html. The analyst assigns one of the following coverage views which represents the analyst's investment
outlook on the coverage group relative to the group's historical fundamentals and/or valuation. Attractive (A). The investment outlook over the
following 12 months is favorable relative to the coverage group's historical fundamentals and/or valuation. Neutral (N). The investment outlook
over the following 12 months is neutral relative to the coverage group's historical fundamentals and/or valuation. Cautious (C). The investment
outlook over the following 12 months is unfavorable relative to the coverage group's historical fundamentals and/or valuation.
Not Rated (NR). The investment rating and target price have been removed pursuant to Goldman Sachs policy when Goldman Sachs is acting in
an advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances. Rating Suspended (RS).
Goldman Sachs Research has suspended the investment rating and price target for this stock, because there is not a sufficient fundamental basis
for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment
rating and price target, if any, are no longer in effect for this stock and should not be relied upon. Coverage Suspended (CS). Goldman Sachs has
suspended coverage of this company. Not Covered (NC). Goldman Sachs does not cover this company. Not Available or Not Applicable (NA).
The information is not available for display or is not applicable. Not Meaningful (NM). The information is not meaningful and is therefore excluded.

Global product; distributing entities
The Global Investment Research Division of Goldman Sachs produces and distributes research products for clients of Goldman Sachs, and
pursuant to certain contractual arrangements, on a global basis. Analysts based in Goldman Sachs offices around the world produce equity
research on industries and companies, and research on macroeconomics, currencies, commodities and portfolio strategy. This research is
disseminated in Australia by Goldman Sachs & Partners Australia Pty Ltd (ABN 21 006 797 897) on behalf of Goldman Sachs; in Canada by
Goldman Sachs & Co. regarding Canadian equities and by Goldman Sachs & Co. (all other research); in Hong Kong by Goldman Sachs (Asia) L.L.C.;
in India by Goldman Sachs (India) Securities Private Ltd.; in Japan by Goldman Sachs Japan Co., Ltd.; in the Republic of Korea by Goldman Sachs
(Asia) L.L.C., Seoul Branch; in New Zealand by Goldman Sachs & Partners New Zealand Limited on behalf of Goldman Sachs; in Russia by OOO
Goldman Sachs; in Singapore by Goldman Sachs (Singapore) Pte. (Company Number: 198602165W); and in the United States of America by
Goldman Sachs & Co. Goldman Sachs International has approved this research in connection with its distribution in the United Kingdom and
European Union.
European Union: Goldman Sachs International, authorized and regulated by the Financial Services Authority, has approved this research in
connection with its distribution in the European Union and United Kingdom; Goldman Sachs & Co. oHG, regulated by the Bundesanstalt für
Finanzdienstleistungsaufsicht, may also distribute research in Germany.

General disclosures
This research is for our clients only. Other than disclosures relating to Goldman Sachs, this research is based on current public information that we
consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. We seek to update our research as
appropriate, but various regulations may prevent us from doing so. Other than certain industry reports published on a periodic basis, the large
majority of reports are published at irregular intervals as appropriate in the analyst's judgment.
Goldman Sachs conducts a global full-service, integrated investment banking, investment management, and brokerage business. We have
investment banking and other business relationships with a substantial percentage of the companies covered by our Global Investment Research
Division. Goldman Sachs & Co., the United States broker dealer, is a member of SIPC (http://www.sipc.org).
Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients and our
proprietary trading desks that reflect opinions that are contrary to the opinions expressed in this research. Our asset management area, our
proprietary trading desks and investing businesses may make investment decisions that are inconsistent with the recommendations or views
expressed in this research.
We and our affiliates, officers, directors, and employees, excluding equity and credit analysts, will from time to time have long or short positions in,
act as principal in, and buy or sell, the securities or derivatives, if any, referred to in this research.
This research is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be
illegal. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of
individual clients. Clients should consider whether any advice or recommendation in this research is suitable for their particular circumstances and,
if appropriate, seek professional advice, including tax advice. The price and value of investments referred to in this research and the income from
them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may
occur. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments.
Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all
investors. Investors should review current options disclosure documents which are available from Goldman Sachs sales representatives or at
http://www.theocc.com/about/publications/character-risks.jsp. Transactions cost may be significant in option strategies calling for multiple purchase
and sales of options such as spreads. Supporting documentation will be supplied upon request.
All research reports are disseminated and available to all clients simultaneously through electronic publication to our internal client websites. Not
all research content is redistributed to our clients or available to third-party aggregators, nor is Goldman Sachs responsible for the redistribution of
our research by third party aggregators. For all research available on a particular stock, please contact your sales representative or go to
http://360.gs.com.
Disclosure information is also available at http://www.gs.com/research/hedge.html or from Research Compliance, 200 West Street, New York, NY
10282.
Copyright 2011 The Goldman Sachs Group, Inc.
No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the
prior written consent of The Goldman Sachs Group, Inc.




Goldman Sachs Global Investment Research                                                                                                                   10

								
To top