What’s Behind the Apple Stock Downgrade?
Apple’s (NASDAQ:AAPL) stock lacks the potential to go materially higher in the next 12 to 24 months, according to Pacific Crest analyst Andy Hargreaves, who cut the company’s rating from Outperform to Sector Perform on Wednesday. The neutral rating effectively brings down Apple’s status as the one guiding the direction of the lines of business it is in to just matching them.
According to the analyst, the current demand environment had changed in a way that the high ends of the smartphone and tablet markets were becoming saturated. Apple’s iPhone, iPad, and Mac lines are all considered higher-end products in their respective sector. That was “likely to limit Apple’s growth by pressuring unit volume and driving a mix shift to lower-margin product,” he wrote in a research note to investors, according to Barron’s.
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Hargreaves wrote that the demand for “incremental” hardware improvements was waning and Apple needed to come up with a big upgrade instead.
“We believe hardware innovation in iPhone and iPad is quickly surpassing consumer demand,” he wrote. “This creates an environment in which substantial innovation is likely to be more expensive to achieve, or customers are likely to choose lower-end SKUs and extend replacement cycles … The crux of our view on Apple is that we believe the company has already sold iPhones to the majority of global consumers who want and can afford one.”
Last month, the same analyst had cut his price target on Apple’s shares to $565 from $645 citing similar concerns. In Wednesday’s note, Hargreaves set a “fair value” range for the shares between $440 and $550, given a “lack of material growth opportunities” and the risk of “lower retention rates among iPhone users or incremental gross margin pressure.”
Hargreaves also cut his iPhone unit estimates to 145 million for this fiscal year from 151 million units and reduced his 2014 estimate to 151 million from 161 million. He brought down his 2013 iPad sales estimate to 78.6 million units from 84.4 million. His 2014 iPad sales estimate of 96.2 million units was left untouched, but he added that the iPad mini was likely to increasingly cannibalize the regular-size model.
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