Apple Downgraded by Two Prominent Firms

Source: Getty Images

Source: Getty Images

Two prominent investment research firms recently downgraded their ratings on Apple (NASDAQ:AAPL) stock as analysts continue to focus their attention on the iPhone maker’s rumored acquisition bid for Beats Electronics. Last Thursday evening the Financial Times broke the story that Apple was seeking to buy the premium headphone maker for $3.2 billion. Although many analysts have struggled to find a rationale for the deal, it appears that the downgrades from analysts at ISI Group and Citigroup last week were not related to the widely publicized Beats acquisition rumors.

In a note issued to investors on Thursday, research firm ISI Group downgraded its rating on Apple shares to “Buy” from “Strong Buy,” while it boosted its price target to $675 from $600, reports TheFlyontheWall. It should be pointed out that ISI Group’s note downgrading Apple was issued before the Beats acquisition story broke on Thursday. The downgrade was a valuation call based on the 15 percent increase in Apple’s share price since early April, according to a research note from ISI Group analyst Brian Marshall that was obtained by Barron’s.

“[U]pside potential is somewhat reduced with the stock now at ~$600,” wrote Marshall. Although Marshall still sees upside potential in Apple shares, the analyst noted that ISI Group’s rating structure requires 20 percent upside in order to receive a “Strong Buy” rating. Marshall also highlighted the company’s “sticky” ecosystem and strong growth in emerging markets as positive signs.

“While we have always believed AAPL’s ecosystem (e.g., iTunes, App Store, iOS, OS X, iCloud, etc.) was highly ‘sticky’ for existing users, we are pleasantly surprised to see AAPL’s user base expanding at a healthy pace (e.g., ~60mil new users in ~6mo, ~1/2 of iPhone buyers new to iPhone, ~2/3 of iPad buyers new to iPad, etc.),” wrote Marshall in a note seen by Barron’s. “Importantly, iPhone 5S is also doing very well in emerging markets where per capital income levels are much lower than in AAPL’s more established markets. This provides us incremental confidence that next generation iPhones / iPads can help continue growing the ecosystem (vs. simply serving as a refresh for the installed base).”

However, Marshall also cautioned that the “Buy” rating on Apple was justified until more information became available about the bill of materials (BOM) on Apple’s iPhone 6.

“We believe $700+/share could be a possibility in CY15 if AAPL can offer greater evidence/visibility on the rapid expansion of its ecosystem (vs. simply becoming a developed market upgrade cycle story),” noted Marshall according to Barron’s. “Until we see the bill-of-materials (i.e., BOM) of the upcoming iPhone 6 which will be the most important financial lever for AAPL in the near-term, we believe it’s prudent to move to a BUY rating at the current ~$600 level.”

Like ISI Group, the analysts at Citigroup downgraded Apple on a valuation call, according to The Legacy. Citigroup cut its rating on Apple to “Buy” from “Strong Buy.” Citigroup also raised its price target on Apple shares to $675 from a previous target of $600. On Friday, Apple shares closed down 0.42 percent, or $2.45, at $585.54.

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