Why Is This Analyst Worried About Apple?

For Apple (NASDAQ:AAPL), a lot can change in three weeks; on November 26, Citi assigned three analysts to follow the stock, started it at a Buy, and increased its price target to $675. Now, Apple is getting both its price target and its rating cut by Citi. On December 16, analysts downgraded the company from Buy to Neutral and lowered its price target from $675 to $575.

Why the Downgrade?

Last month, Citi analysts Glen Yeung, Walter Pritchard, and Jim Suva gave Apple a Buy rating based on a strong iPhone 5 sales forecast. However, even with the Buy rating in place, the firm showed some reservations; the price target Citi gave the stock was 11 percent below Wall Street’s consensus. To support this assessment, the analysts wrote in their coverage that iPhone sales were sure to decelerate in the next six to 18 months.

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Already, evidence of slowing sales has materialized. As commentary by Jefferies analyst Peter Misek revealed, Apple has reduced component orders for the first quarter of 2013, and as a result, Misek estimates that iPhone orders will be cut from 35-40 million down to 25-30 million. In this case, the problem is not with customer demand, but with component overproduction in the last three months.

Taking into account these new figures and increasing competition from Samsung, Citi’s three analysts downgraded Apple’s stock. In their coverage, Yeung, Pritchard, and Suva wrote, “near-term supply chain order cuts, while inconclusive in nature, bring into question the strength of iPhone 5 and refocus investors onto risks in the Apple story. As such, we see the likelihood of any near-term rally as diminished.”

Last week, analysts at UBS and Jefferies cut their price targets on the stock, but maintained Buy ratings.

CHEAT SHEET Analysis: Is Citi’s Downgrade a Negative Catalyst for Apple’s Stock?

One of the core components of our CHEAT SHEET Investing Framework focuses on catalysts that will move a company’s stock. From October to December, Citi found that Apple had increased monthly iPhone 5 production output by 45 to 50 percent. While this improvement was better than expected, Apple has had to cut orders for the first quarter next year. According to Citi, the order cut is reasonable, but it is also a warning sign; if iPhone 5 demand was high, manufacturers would not be overproducing.

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