April 10, 2012
Apple Gets Rare Downgrade Over iPhone Subsidy Concerns
Shares of Apple Inc. were downgraded for the first time in six months on Monday over doubts that wireless network operators will continue their generous subsidies of the popular iPhone.
“We expect post-paid wireless operators to remain firm in their plan to stunt the pace of phone upgrades in 2012 and we expect to see some initial evidence of their success in the current quarter,” wrote BTIG Research analyst Walter Piecyk in a note to clients.Any changes to carrier subsidies of the iPhone -- the highest in the mobile handset industry -- would mean fewer upgrades, wrote Piecyk.
“This will increase the need for Apple to grow its business in the pre-paid dominated emerging market space, in which handset subsidies are a rarity and the $600 ASP (average selling price) of the iPhone represents a big chunk of a household´s monthly income.”
Piecyk moved his recommendation on Apple´s stock from “Buy” to “Neutral”, and removed his 12-month price target of $600, a price the stock surpassed earlier this year.
Apple´s current iPhone models are priced at $199, $299, and $399, but carriers subsidize those prices by hundreds of dollars per unit. Wireless operators were initially happy to provide the subsidies based on expectations that customers who use the iPhone would increase their monthly wireless bills, offsetting the subsidies and then some.
But that hasn´t been the case, particularly for AT&T, Apple´s largest customer.
AT&T, Sprint, Verizon, Vodafone, Deutsche Telecom, Telefonica and America Movil are among the carriers expected to scale back on their subsidized iPhone upgrade offers, Piecyk said.
This could lead Apple to miss its revenue by up to $1 billion from the current consensus analyst estimate for the fiscal third quarter, he said.
The last analyst to downgrade Apple, the world´s largest company, was BGC Partner´s Colin Gillis last October. Since then, Apple´s stock has soared more than 60 percent amid better-than-expected iPhone sales, the launch of a new iPad and Apple´s declaration of a dividend.
As of today, forty-five analysts have “buy” ratings on Apple´s stock, while just five have a “neutral” rating and only one has a “sell” rating, CNBC reported.
Apple is also the most widely held stock among U.S.-based hedge funds.
Piecyk said he believes the catalyst for a pullback in Apple´s stock is the lack of a groundbreaking new product launch in 2012.
Unlike many of his peers, Piecyk does not expect an Apple iTV flat panel to be launched this year.
“We believe that investors should take a breather during the expected strength of this quarter and the rapid rise in the stock,” he wrote.
However, Piecyk said he is not an "Apple hater,” and that he is "completely bought into the Apple ecosystem."
"Our family of six owns 4 iPads, 2 iPhones, 1 iPod Touch, 2 MacBooks, 1 iMac and two Apple TV's; and that is just the stuff in active use," he wrote.
"After dinner, the kids prefer to stream YouTube or play games on the iPads rather than watch the tons of available programming stored on the networked DirecTV HD DVRs.”
Shares of Apple´s stock were down as much as one percent in early morning trading on Monday on news of the downgrade, but turned positive before 11am EST. The stock was up $2.55, or 0.4%, for the day, closing at $636.23.