Could Apple Get Squeezed by 2014?

Nomura Equity Research opened its coverage of Apple (NASDAQ:AAPL) stock with a pessimistic long-term view, predicting the company’s growth rate will drop drastically within the next two years. Stuart Jeffrey wrote in a note to investors on Tuesday that with nearly everyone who can afford a smartphone in the developed world having one by 2014, Apple’s earnings growth rate will go from the current 50 percent per year to less than 10 percent. Jeffrey said that while growth will continue in developing countries, price competition will also make the iPhone less profitable.

“From 2014, developed market growth is seen slowing to single digits,” Jeffrey wrote. “As a company predominantly driven by mobile phones, an industry prone to volatility, we see little scope for upside given our single-digit earnings growth forecast beyond 2014. We thus believe that iPhone gross margins could contract by up to 10 percentage points, and this drives our FY 2014 EPS estimate to 12 percent below consensus.”

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He added that iPad gross margins could also get pressured with rivals Google (NASDAQ:GOOG), Amazon (NASDAQ:AMZN), and possibly Microsoft (NASDAQ:MSFT) launching tablets at zero gross margin. That will make Apple’s pricing premium “difficult to sustain.”

Jeffrey was fairly upbeat on short-term results. “Our supply-side checks in Asia in combination with our new demand-side model suggest Apple’s iPhone sales could slightly beat recently lowered expectations for fiscal Q1 [ending December],” he wrote. “Moreover, supply constraints suggest that demand for the iPhone and iPad mini is likely to spill over into Q2, supporting near-term earnings dynamics and the share price.”

The analyst put a neutral rating on Apple shares, which are up more than 55 percent year-to-date, but have fallen about 7 percent over the past month. Jeffrey’s $710 price target is also below the average analyst target of $791, as polled by FactSet. Apple dropped 0.36 percent to close to at $635.85 on Tuesday.

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