APPLE DOWNGRADED: Expectations Are Too High, Says Analyst

tim cook

[credit provider=”AP”]

Here’s something you don’t see every day.(In fact, we can only remember it happening one other time this year.)

Apple has been downgraded to hold from buy by Colin W. Gillis at BGC, a small brokerage firm. 

Why is Gillis slapping a hold rating on Apple? At $422, the stock is trading near his $450 price target, and he thinks expectations are way too high for Apple.

He writes, “With the largest market capitalisation 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. The company has to constantly set records just to meet expectations.”

He thinks the company’s business is strong, but he’s waiting for investors to turn negative on the stock. If shares dip below $400, then he thinks it’s time to buy.

Gillis has three specific reasons for why/how the stock could drop to sub-$400. Straight from his note, here they are:

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 mind-blowing 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.