Wells Fargo Downgrades Apple (AAPL) to Market Perform; Sees Pressured GM, Tighter Market Opportunity

January 2, 2014 6:33 AM EST
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Price: $161.84 -1.17%

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    44 Buy, 20 Hold, 5 Sell

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    Up: 12 | Down: 10 | New: 42
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Wells Fargo downgrades Apple (Nasdaq: AAPL) from Outperform to Market Perform, while keeping its $536 to $581 valuation range.

Analyst Maynard Um commented, Our bullish thesis on Apple had been predicated on the expectation for gross margin (GM) expansion driven by the 5s cycle. While we still have conviction in the gross margin thesis (and the potential for iPad/iPhone unit upside), we believe this may be largely embedded into the valuation.

Um sees positive catalysts in 2014, including the iPhone 6, iBeacon, and iWatch, along with the potential for increased dividends and/or buybacks.

There are three concerns Um notes:
  1. Gross margin coming under pressure later this year with the iPhone 6 cycle;

  2. Limited amount of market opportunity for existing product segments Apple participates in; and

  3. A shift in the balance of power from handset vendors back to wireless providers
On gross margin concern, Um said, Gross margins have decreased by an average of 225 basis points (bps) in the period following the launch of new form factor iPhones while increasing ~225bps in the two quarters following an ā€œsā€ launch. With the secular story, in our opinion, largely over, we believe the stock may be more susceptible to trend with margins.

Um also notes that Apple's market cap gains didn't necessarily come from increased consumer spending, but rather the transfer of dollars from competitors. Less market cap to absorb from peers will put pressure on Apple moving forward.

On the shift of power, Um comments, Wireless operators have been offering generous subsidies of ~$400 per smartphone, getting the price to consumers to ~$250 in an effort to drive increased smartphone penetration.

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

Shares of Apple closed at $561.02 on Tuesday, with a 52 week range of $385.10 to $575.14.

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