Apple drawing cooler view from Wall Street
Some analysts lower price targets, believing margins have peaked
Nov. 26, 2012, 11:58 a.m. EST
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By Dan Gallagher, MarketWatch
SAN FRANCISCO (MarketWatch) — Apple Inc.’s shares have begun to bounce
back from a brutal selloff over the past two months, but some on Wall
Street, believing that the company’s profit margins may be peaking, are
adopting a cooler view of the stock.
On Monday morning, Apple shares
AAPL
+2.80%
were up more than 1% at $578. The stock is up about 10% from its
closing price before the Thanksgiving week, though it remains about 17%
below its peak, slightly above the $700 mark, on Sept. 21 — the day the
iPhone 5 went on sale.
Wall Street’s analysts remain overwhelmingly bullish on Apple, with 88% of the covering brokers rating the shares as a buy.
However, more are beginning to moderate their views on the company’s
outlook, with concerns that the popular iPhone may be at its peak profit
margin and that growing sales of the iPad with the launch of a smaller
version will crimp the company’s overall gross margin, which Apple has
been able to keep above the 40% line for several quarters.
“We assert that Apple’s share of the smartphone market is at risk from
low-end smartphones and competition from other ecosystems,” a team of
Citigroup analysts wrote in a note Monday morning. “We see upside from
tablets, but this negatively impacts [gross margins].”
Apple’s Phil Schiller shows off the new iPad mini at Oct. 23 event.
The Citi team initiated the stock with a buy rating but added a $675
price target that is about 12% below the current median target on Wall
Street, “reflecting our perception that risks for Apple are increasingly
coming into focus.”
Another broker, Pacific Crest Securities, also lowered its target on
Apple on Monday. Analyst Andy Hargreaves trimmed his target to $645 from
$670, citing his belief that higher costs of goods sold, or COGS, for
the iPhone 5 will push Apple’s overall gross margin to 38.8% from 40%
for the December quarter.
“Declining gross profit dollars per iPhone and volume sales of iPad are
driving lower gross profit per unit of Apple product sold,” Hargreaves
wrote in a research note, adding that “exceptional unit volume is
required to maintain growth at Apple.”
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Apple itself warned in its Oct. 25 earnings report that launching so
many new and redesigned products in the current quarter would crimp
short-term profit margins, as manufacturing costs are normally higher
early in a product’s life cycle.
That disclosure contributed to tempered views on the stock. At least 15
brokers have trimmed their price targets on Apple since the report, by
an average of 5%, according to data from Thomson Reuters. That brought
the Street’s median target price down to $760 from $780 — still more
than 30% above the stock’s current trading level.
That has kept most of the Street bullish on the company. In his own
report on Monday, UBS analyst Steven Milunovich maintained a buy rating
and $780 price target, noting that “valuation, earnings momentum, and
technical factors suggest that it is a good time to be building
positions into the new year” on the stock.
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“We expect the gross margin to return to the mid to low 40s,” he said.
In their report, Citi’s analysts said they believe Apple will retain a
strong position in smartphones and tablets, given its “leading position
in the cumulative market for ecosystem devices.” They added that the
company has been able to command a “dominant share” of profits in these
markets.
But they added that several signs point to a slowdown following a period of “explosive growth” for the company.
“Simplistically, the law of large numbers constructs this deceleration,”
they wrote. “But when contemplating market growth away from Apple,
increased pressure from competitors, and likely ASP [average selling
price] and mix pressure on margin, investors are right to be
incrementally more concerned about growth deceleration.”
That view was also echoed by Toni Sacconaghi of Bernstein Research, who
wrote Monday that Apple “is transitioning from a hypergrowth story to a
more traditional, high-quality branded company store.” His rating and
price target on the stock: outperform and $800.
“Coupled with strong year-to-date performance and profit taking, this is
causing turnover in the investor base and underperformance over the
last two months,” he wrote, adding that he believes the company “remains
exposed to attractive end markets (most notably smartphones and
tablets), that it has a strong consumer brand and high customer loyalty
given its iOS platform, and that its valuation remains compelling.”
Dan Gallagher is MarketWatch's technology editor, based in San Francisco. Follow him on Twitter @MWDanGallagher.
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