Apple Inc. (NASDAQ:AAPL) has taken a beating since its earnings report last week, and now analysts are starting to take a second look at the stock. While some, like those at Barclays PLC (LON:BARC) (NYSE:BCS), are looking on the bright side, others are retaining their bearish view on the stock.


In a report issued to investors, analysts at Jefferies Group, Inc. (NYSE:JEF) explained further why they downgraded shares of Apple after the company’s earnings report next week. They have reiterated their Hold rating and $500 per share price target for the stock and listed three big reasons why they don’t think the stock can work right now.

Problem #1: Low iPhone Demand

Jefferies analysts said the biggest errors made recently in estimates for shares of Apple Inc. (NASDAQ:AAPL) have been around iPhone component orders. They said CEO Tim Cook urged investors not to put too much weight on a single data point, although their supply chain database indicated that something was wrong. They believed previously that there was simply an oversupply of components rather than a lack of demand for the iPhone 5. They also thought that sales percentages of the iPhone would hold, but they didn’t, so the lower demand is one reason they downgraded the stock.

Problem #2: Gross Margin Pressure

Another big reason the analysts downgraded Apple shares was due to pressure on the company’s gross margins. They said the company’s March quarter guidance doesn’t leave much room for an upside, and they believe that gross margin pressure “will make it difficult for the stock to work.”

Analysts at Jefferies Group, Inc. (NYSE:JEF) said they estimate that gross margins for the 2014 calendar year will be around 38 percent, but they see some downside risks to their estimate. Apple’s feud with Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930) is causing Apple’s suppliers to demand higher rates. Also low-end products like the iPad Mini and the expected low-end iPhone are and will cannibalize the larger versions of these products. As Apple seeks to shorten its product cycles, profit margins will contract while the company works through yield problems.

Problem #3: Product Cycle Problems

Their third issue with shares of Apple Inc. (NASDAQ:AAPL) is problems with product cycle execution, especially in terms of the large 4.8 inch iPhone 6.

Investors have been clamoring to know when the company will release the large 4.8 inch iPhone 6 that’s rumored to be in the works. Jefferies Group, Inc. (NYSE:JEF) analysts said although they believe Apple Inc. (NASDAQ:AAPL) wasn’t going to launch the larger iPhone until the 2014 calendar year, the company is attempting to accelerate that launch in order to stem its losses in market share.

They believe the earliest Apple Inc. (NASDAQ:AAPL) could launch the larger iPhone would be in the fall, possibly October of this year. However, they think a more realistic date for the launch would be June 2014. The analysts said if Apple Inc. (NASDAQ:AAPL) does launch the phone in October they think the company’s gross margin would be hurt because yields would be poor. They believe Cook defended the smaller iPhone screen in the company’s earnings call “in order to avoid freezing iPhone shipments in the quarters before a 4.8 inch launch.”

What’s Ahead For Apple Inc. (NASDAQ:AAPL) In 2013?

Jefferies analysts also gave their expectations for a 2013 calendar year road map:

  • June or July – iPhone 5S and a low cost iPhone
  • Third calendar quarter – 10-inch iPad 5 and 7.85-inch iPad Mini 2
  • Sept. or Oct. – iTV
  • Oct. at the earliest – 4.8-inch iPhone