Analyst: High Hopes Are Killing Apple

Apple (NASDAQ:AAPL) was bumped from its Outperform rating to Neutral by analysts at Baird Equity Research, who also cut down the iPhone maker’s price target to $465 from $570. According to the firm’s research note to investors on Monday, high consensus estimates, which were unreasonably high, posed the maximum danger for the stock.

Apple shares slipped to a new 52-week low of $435 last Friday.

“We are increasingly wary of several near-term risks, particularly consensus estimates that we believe remain frustratingly too high,” Baird’s William Power wrote. “With estimates likely to fall further and gross margin concerns likely to linger, we believe the shares could drop further, despite the sharp sell-off and valuation.”

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Power projected revenue of $41.8 billion and profits of $9.84 per share for the current quarter, below the current consensus figures of $43.3 billion and $10.38 per share, respectively. Apple’s guidance was for between $41 billion and $43 billion in revenue. The analyst was even more worried about the June quarter, in which, he noted, consensus estimates were projecting a 4.9 percent sequential revenue drop. According to Power, that drop may be as large as 13.4 percent.

According to the analyst, while he remained positive on Apple’s “leading product portfolio, unmatched ecosystem, and potential new products,” he was looking for a “more significant reboot of estimates” to become aggressive on the stock again.

The biggest concerns for Apple, according to the analyst, were gross margins, especially if the company were to launch a cheaper iPhone model this year. “With [the] iPad mini impacting fiscal Q1 and fiscal Q2 margins more than we had expected, gross margin concerns are likely to remain a significant overhang,” he wrote. “A lower-priced iPhone could also be a dual-edged sword due to potentially lower margins.”

Other matters of possible worry included disappointing demand outside the U.S. and China, slowing innovation, increasing competition, and market uncertainty.

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