Apple Inc. (NASDAQ:AAPL) shares tanked 1.12% in pre-market trading Thursday after Wells Fargo analyst Maynard Um downgraded the stock from an Outperform rating to Market Perform, though Um maintained the valuation range of $536-$581. Wells Fargo’s skepticism over Apple Inc. (NASDAQ:AAPL) is driven by gross margin concerns. Maynard Um noted that his bullish thesis on the stock was based on expectations of gross margin improvement, helped by the iPhone 5S.
Apple’s gross margins to decrease with iPhone 6 cycle
Though the analyst is still optimistic about gross margins, and potential upside in the iPhone and iPad unit sales, Wells Fargo believes that it’s already been embedded in the valuation. Other potential catalysts for Apple Inc. (NASDAQ:AAPL) may be the iBeacon, iPhone 6, iWatch, increased dividend or a larger buyback. Um notes that Apple Inc. (NASDAQ:AAPL)’s gross margins have historically declined by about 225 basis points after the release of an entirely new iPhone (such as iPhone 4, iPhone 5). But margins go up by 225 basis points when an upgraded version (such as iPhone 4S, 5S) is launched.
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So, gross margins could come under pressure with the iPhone 6 cycle in 2014. Moreover, Wells Fargo said that Apple Inc. (NASDAQ:AAPL) participates only in a few market segments, which may limit the market opportunity for the company. Another significant concern is that the balance of power is shifting again from smartphone vendors to telecom operators. Wireless providers have been offering massive subsidies of more than $400 per device to increase the smartphone penetration.
Apple Inc. (NASDAQ:AAPL) usually signs a long-term deal with carriers, so the company doesn’t face any big risk. But the Cupertino-based company’s CEO Tim Cook believes that the power still lies in the hands of Apple Inc (NASDAQ:AAPL). He said last year that iPhones help wireless operators attract high-priced and loyal customers.
37 analysts rate Apple a buy
Many other analysts have also released their reports on Apple Inc. (NASDAQ:AAPL) in recent weeks. On December 23, Raymond James increased its price target for Apple Inc. (NASDAQ:AAPL) to $700. Last month, UBS called Apple Inc. (NASDAQ:AAPL) a stalled growth stock. In total, 37 analysts have a Buy rating on the stock, two say Apple Inc. (NASDAQ:AAPL) is a Strong Buy, another 13 have a Neutral rating, while only two analysts have a sell rating on the stock.
Apple Inc. (NASDAQ:AAPL) shares were down 0.93% to $555.60 in early market trading Thursday.