UPDATE: Barclays Lowers Apple (AAPL) to Equalweight; Robust Pipeline Isn't Enough to Move Shares (MSFT)

February 20, 2014 6:33 AM EST
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(Updated - February 20, 2014 10:24 AM EST)

Barclays is lowering its rating on Apple, Inc. (Nasdaq: AAPL) from Overweight to Equalweight today, while maintaining its $570 price target.

Analyst Ben Reitzes believes that smartwatches and HDTVs aren't a good enough reason for the stock to move outside its current trading range over the next year or so. He comments, As a result, we believe it is time to step aside, given a maturing smart phone market. Eventually Apple could even see margin pressures as it adds advanced new features to new iPhones at similar price points later this year and into next (things like Sapphire glass, curved glass, new batteries, etc.).

Reitzes is excited about several iPhone products in the company's pipeline, including payment innovation, geo-location, and lifestyle/wearable devices. We believe Apple’s story is all about iPhones and “new categories” seem to be designed to make the iPhone more useful – but don’t necessarily re-accelerate growth in the iPhone category to sustainable double-digit levels, the analyst said.

While it has been a key go-to in the past, Reitzes also thinks the valuation argument is becoming less valid. He looked at Microsoft (Nasdaq: MSFT) from 2000 to 2010 as an example, saying there was no precedent that large tech companies would begin to outperform again following a rough couple of years if the law of large numbers is catching up to them and margins have peaked. What are some similarities that Apple and Microsoft have shared? The analyst observed the following:
  1. Microsoft's all-time high market cap of $620 billion was hit in 1999, becoming the clear winner in the PC/Internet revolution. Apple beat the most-valuable company record in August 2012, which shares rose above $700 following the launch of iPhone 5. Apple's market cap hit a peak of $650, making it the mobility revolution winner;

  2. Investors have re-rated the companies given ebbing expectations that each company will have a next big thing product in the pipeline. Apple now trades at 12.7x consensus 2014 estimates – down from its P/E of 15.9x in October 2012. Microsoft traded around 20x in 2004 after a strong rebound in 2003, but its multiple has settled in the mid-teens since that time;

  3. Both companies peak market valuation coincided with a high point in gross margins; and

  4. Both Apple and Microsoft eventually gave into market pressure for a more shareholder-friendly capital allocation; Microsoft issued dividends while Apple gave the nod to dividends and buybacks. Both efforts didn't lead to a resurgence in share price, Reitzes noted.
Another point Reitzes makes is that Google (Nasdaq: GOOG) has largely been able to keep up with Apple in creating a robust ecosystem and may even pass Apple in five years. From a secular standpoint, we believe companies need to prepare product portfolios for the rising trend of the “Internet of Things” (IoT) and Google is assembling a list of potential acquisitions already. Google’s recent acquisition of Nest could be case in point to how the market may move further into home automation, the analyst noted.

Given all of the above, Apple might also need to step-up its R&D and OpEx to keep pace in the IoT environment. The analyst comments, Apple invests the smallest amount in R&D and also maintains one of the leanest opex structures. While revenue per employee is quite high – at over $2 million it is by a wide margin the highest in the group – growth seems stalled compared to Amazon, Google and Facebook. We would point to the lack of real new products of late as the reason for the growth differential – and that may be something that Apple may have to spend to fix.

For an analyst ratings summary and ratings history on Apple click here. For more ratings news on the company, click here.

Apple closed at $537.37 on Wednesday, with a 52 week range of $385.10 to $575.14.

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