Hats off to BTIG’s Walter Piecyk for making a call that’s almost never worked out for anyone ever: He has downgraded Apple from BUY to Neutral.Here are the key points behind Piecyk’s call:
- First, Apple will have another blowout quarter. Revenue will be $40 billion for Q2 vs. current estimates of $36 billion. But that’s where the good news ends.
- 2012 will be the year that the wireless carriers fight back against having their margins constantly squeezed.
- Specifically, they say that new new policies (especially from AT&T) will stunt the pace of product upgrades, depriving Apple of sales.
- Thus in Q3, there will be a sequential decline in iPhone sales, and revenue will come in $1 billion below current consensus.
Here’s the crux of the call that fiscal Q3 will result in a big msis:
We expect quarterly upgrade rates to contract further in calendar Q2 (Appleʼs Fiscal Q3) based on typical wireless seasonal trends and likely increased speculation on the anticipation of a new iPhone in the second half of the year. Recall that investors were surprised by Appleʼs Fiscal Q3 results last year because of the slowdown in iPhone sales ahead of the expected launch of the iPhone 4S. We also do not expect a material broadening of market launches for the product like what was seen in the first calendar quarter. Specifically, we expect Appleʼs iPhone sales to drop to 27.5 million units in Fiscal Q3 resulting in a revenue estimate that is $1 billion below consensus. Investors have grown accustomed to upward revisions of revenue estimates by analysts after Apple reports strong quarterly reports.
As for AT&T, we have forecast that its upgrade rate will drop to 8% in Fiscal Q3 resulting in 3.25 million iPhones sold during the quarter, which is down from the 4.2 million phones we expect in Fiscal Q2 and the 7 million sold in Fiscal Q1. If AT&T customers start to expect a new iPhone in June or July, the upgrade rate could dip even lower. In 2011, the calendar Q3 upgrade rate fell to 7.5% ahead of the launch of the iPhone 4S. That is below our 8% estimate for Fiscal Q3. Also keep in mind that our estimate of total smartphones sold by AT&T of 26.7 million is above the 25 million in smartphone sales the company has cited in order to meet its 40% wireless EBITDA margin target and ability to grow earnings.
As for some other points:
- There will be no Apple TV this year.
- The iPad isn’t that big of a deal. In 2011 the ipad generated less than 50% of iPhone revenue, and that gap will widen.
- The Chinese market is promising, but ultimately it may be overrated for a while given the price point of Apple products.
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