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WHAT? An Apple (AAPL) Downgrade...

October 17, 2011 9:07 AM EDT Send to a Friend
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Despite mind-blowing iPhone 4S sales of 4 million units over the weekend, traders are talking about something else related to Apple (Nasdaq: AAPL) this morning... a downgrade.

Apple received a rare downgrade Monday from Colin Gillis at BGC. This is the first downgrade in seven months according to data at Ratings Insider.

Gillis took his rating on the world's most valuable company from Buy to Hold as shares approach their $450 price target. He said near-term downside outweighs upside at this point.

He notes shares have surged 14 percent since October 7, and increased 31 percent year-to-date. The company has to constantly set records just to meet expectations, he said.

"With the largest market capitalization for a U.S based company at $391 billion,
any hiccup in its growth is likely to provide an opportunity to add to positions at a better price," Gillis stated.

He sees a possible pullback to $400 as soon as this week after the company reports earnings after the close on Tuesday. He would recommend buying below the $400 level.

Gillis said while Apple is engulfed in a "sea of love he voices the following notes of caution:

1. Impact of the pending launch of the iPhone 4S on sales in the Sep. quarter
Consensus estimates of 20 million phones sold may prove difficult to exceed given the launch of the 4S phone in the December quarter. While the company did an excellent job at delaying any discussion of a new phone until after the quarter ended, it is worth recalling that this September results have a phone that was at the end of its refresh cycle, not the start of a new one – as has been the case in September quarters in the years past.

2. Education discounts.
September quarter margins also run a risk from impact due to education pricing discounts. Cost of revenue last year in the September quarter increased notably from 60.9% to 63.1% sequentially. While this was also driven by the launch of the iPhone4, it is worth mentioning that the September quarter does contain the most impact to margins from educational buying.

3. iPads.
Our largest concern is centered around tablets, however. There is limited history of how seasonality and product refresh is going to impact sales of iPads, and consensus estimates of 11.5 million units sold assumes another record shattering. As the iPad is Apple’s second most meaningful revenue stream after the iPhone, if the company does not continue to set mindblowing records (iPads sales account for over 10% of worldwide PC sales just five quarters after launch) it is going to be difficult for the other parts of the business to cover the gap. Finally, low-cost tablets from competitors willing to lose profit to gain market share are going to incrementally hurt sales of the iPad in our opinion.

Gillis sees Q4 revenue of $29.2 billion, which is below the consensus of $29.5 billion. He sees EPS of $6.69, which is below the consensus of $7.29.




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iPhone 4, Earnings

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