Bank of America downgrades Apple

Bank of America Merrill Lynch analysts are worried about slowing iPhone sales.

In a note Wednesday, BAML analysts downgraded the stock from “Buy” to “Neutral,” with a new stock price target of $US130 from $US142.

“Although the long term opportunity is significant, we expect near term pressure on shares,” the analysts wrote.

They had six reasons for the downgrade:

  1. They see a slowdown in revenue growth because iPhone sales are also slowing, and new products like Apple Watch and Apple Music are taking time to catch on.
  2. China now accounts for 25% of all iPhone sales, and it’s going to be hard to increase that share.
  3. The strong dollar will likely harm profits over the next few quarters, and profits are correlated to the stock price.
  4. Apple is not crushing earnings estimates like it used to, and so analysts may lower their expectations.
  5. The iPhone 6S and 6S+ (or what the upgrade to the iPhone 6 is oficially called), will include new features including force touch, but these won’t be enough to drive the stock meaningfully higher.
  6. The analysts don’t see incremental capital return announcements beyond those already announced for the near future.

For the second quarter, Apple reported earnings and revenues that topped estimates, but iPhone sales disappointed.

Here are the analysts again:

“Given Apple’s expertise from supply chain all the way to software, Apple can become a significant player overnight across many markets (music, gaming, social media, streaming services, MVNO, etc.). Although we recognise this potential and continue to expect Apple to deliver phenomenal products, we believe the financials will take a pause from the significant growth witnessed over the past year and we would become more constructive at a lower stock price, when risk reward becomes a better trade off.”

The stock fell 1% to around $US114.64 per share in premarket trade on Wednesday morning. In the previous session, it slid towards year-to-date lows and fell more than 3%.

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