Barclays Lowers AAPL Rating Over Growth Concerns

| Apple Stock Watch

Barclays analyst Ben Reitzes is lowering his rating for Apple's stock even though he's excited about some of the products the iPhone and iPad maker is developing. His concern is that new markets for the company, including wearable technology, won't do much to help boost iPhone sales.

New product categories may not help maintain iPhone sales growthAnalyst: New product categories may not help maintain iPhone sales growth

Mr. Reitzes told investors,

We believe Apple's story is all about iPhones and 'new categories' seem to be designed to make the iPhone more useful – but don't necessarily re-accelerate growth in the iPhone category to sustainable double-digit levels.

Apple has been rumored to be moving into the wearable technology market and has been hiring health and fitness experts over the past couple years, presumably to help develop devices for the category. The company's first move into the category is expected to be the iWatch, which will include some form of fitness tracking and monitoring.

According to Street Insider, Mr. Reitzes thinks Apple is facing the potential for lower margins with the launch of the next iPhone model later this year. He said, "Eventually Apple could even see margin pressures as it adds advanced new features to new iPhones at similar price points later this year and into next (things like Sapphire glass, curved glass, new batteries, etc.)."

To help drive his point home, Mr. Reitzes points to Microsoft's market cap after it became the dominant player in the PC market. From 2000 to 2010 Microsoft didn't outperform again after hitting its all time high market cap of US$620 billion in 1999. Apple's market cap has hit $650 billion, and he sees that as the company's high point.

Apple also needs to increase its research and development spending to keep up in the new Internet of Things market.

"Apple invests the smallest amount in R&D and also maintains one of the leanest opex structures. While revenue per employee is quite high – at over $2 million it is by a wide margin the highest in the group – growth seems stalled compared to Amazon, Google and Facebook," he said. "We would point to the lack of real new products of late as the reason for the growth differential – and that may be something that Apple may have to spend to fix."

Despite Mr. Barclay's concerns, Apple is still growing and the iPhone has potential to expand in a big way now that the company has all three of China's big time cell service providers as partners. Apple is also taking a more agressive iPhone growth position in other markets including India.

Mr. Reitzes lowered his rating for Apple's stock from "Overweight" to "Equalweight," but maintained his $570 target price. Apple closed on Thursday at $533.56, and was trading in the pre-market on Friday at $532.72, up 1.57 (0.30%).

Comments

Mark Fuller

I see this as the opposite of pump and dump. Dropping APL price now insures a quick surge which makes a ton for well placed investors. Investors don’t make money holding stock, they make it by selling.

geoduck

You’re likely right about the strategy.

I would quibble with one part though. Investors buy and hold. These are traders not investors. They just want a quick buck and don’t care about next quarter.

Constable Odo

Owning Apple is pretty laughable.  Apple is basically throwing money down the toilet with buybacks and the stock is as weak as it ever was.  Any two-bit analyst can say a few disparaging words about Apple and the stock simply collapses.  Google shares will probably reach $1400 before Apple’s hits $600 at this rate.  Apple is going nowhere fast.

Even a nearly profitless company like Facebook can make multi-billion dollar acquisitions while Apple doesn’t spend more than a few hundred million for small acquisitions.  Those little purchases aren’t going to move Apple’s revenue needle at all and will simply put hopeful investors to sleep.  I’m not saying Apple should throw away money but at least do something large enough that will start investors salivating.  Google can do it, so why not Apple.

Apple as a company is in financially fine shape but shareholders are being treated as if they don’t even exist.  Why a company like Apple can’t pull on board more institutional shareholders is well beyond my understanding.  Apple doesn’t seem to be a big investment risk at all but is certainly an object of lousy market sentiment.  I guess most of that bad sentiment occurred when Apple handed over the smartphone market to Samsung back in late 2012 and the share price fiasco ensued.  Once burned, twice shy must be the way investors feel about Apple.  Never bet on a company that lets rivals run over it and never seems to retaliate.

wab95

Constable:

Your comments regarding investor (or as geoduck argues, ‘trader’) perceptions are insightful, and are not without no small amount of merit.

That said, since you cite them, let’s ponder a moment a tale two tech giants and pair them with just one of their notable acquisitions:

1. Google - Motorola

2. Facebook - WhatsApp

Time doesn’t permit me a detailed treatment, merely a summary lesson learnt, besides, all of this can be easily researched.

Cases (the ‘tales’):

1. Google - Moto:

Rationale: By most accounts, this was a defensive move to strengthen Google’s patent portfolio and its hand relative to Apple, MS and others. It was also seen by many, however, as a means to put Google in real contention for hardware/software manufacture and integration; in short, doing the whole widget thing and controlling that process soup to nuts.

Result: it accomplished neither. Lost opportunity on both counts.

Lesson: Unless the tech giant making the acquisition has a plan, the acquisition will not only fail to monetise and strengthen the company’s earning power (never mind protecting IP), the acquired company can lose value, become a drag, and wind up a substantial net loss. If you’re Google apparently, investors, and by that term I mean investors who study the industry and go long, may cut you some slack, but only if the remainder of your operations are at least keeping pace, or to the investor, holding value. It doesn’t hurt, in investors eyes - again apparently - to continue to make other large investments (e.g. robotics) whose objective and commercial release may be years downstream. Keep acquiring and make vague promises about an unspecified future.

2. Facebook - WhatsApp:

Rationale: By many accounts, this was (is) an act of desperation by a company losing its cool and appeal, or in investor-speak, its principal market to newer, cooler, trendier competitors, and is struggling to both remain relevant and monetise that relevance principally in the mobile space where its principal market lives. WhatsApp is growing faster than FB in the sector to which FB once upon a time had appeal. By acquiring this, FB gets instant cachet (assuming its mere presence is not a turn-off to WhatsApp’s client base) and user numbers, at least in one core activity area, messaging, than FB could acquire on its own. Most analysts appear to see this as desperate but smart, not to mention risky.

Result: Too soon to say, but the challenge is, how to preserve WhatsApp’s business model of no adverts and still make a profit from this acquisition. If it fails to do this, worse, if it bleeds market share and haemorrhages its user base, or in investor-speak, if its (WhatsApp’s) market collapses, FB will have effectively scored an own-goal with this acquisition (there are other, less polite analogies, but you get the point).

Lesson: Again, premature, however consensus suggests that unless FB can make this acquisition enhance its own growth rate and profitability, this could be a bust and disappoint investors. It has to do so, furthermore, in a way that doesn’t chase off young clients who don’t want to see ads or other signs of FB stickiness and intrusion. No doubt, FB will have to use some clever, back end ‘Fu to pull this off, of which it is capable, but it has a steep and treacherous hill to climb. The outlook is uncertain, at best. And investors love this? Apparently, some but not all.

Apple, on the other hand, doesn’t need to strengthen its patent portfolio, merely protect it, for those products and services in which it competes. Apple is not bleeding its user base because of lost mojo and cool with the trendy crowd, nor does it need to run out ahead of a freight train in order to convince investors that it’s leading the train. Nor is Apple like MS (we could have cited the MS - Skype acquisition, but that sad tale is scarcely even instructive), in which we have a two-trick company with a brilliant, if ruthless, marketing strategy that will serve it only so long as those two products remain essential for a large market, however defined. Apple continues to expand into new markets (including emerging ones) with new products and services. Investors love this? Few, but not most. Do they understand this? Based on commentary, no. Not at all. Is Apple, by any objective indicator (Wall Street’s opinion is not an objective indicator) in decline? No, by every meaningful indicator, it continues to thrive.

Lesson: Apple, if this is correct, continues to take the industry, and the Street, to school on what constitutes true value and a solid investment. Just look at that market brand value according Brand Finance’s analysis (again) this year.

Vasant

Constable Odo:

To my understanding, your main point is that investors need to see a new engine of growth before they will believe in Apple. This point is correct. However, if you are suggesting that “doing something large” means making a giant acquisition of some sort just to “get investors salivating again,” I must say that that is going to amount to nothing more than a knee-jerk reaction with little to show for it.

Acquisitions are meant to help a company acquire assets that help it generate new sources of revenue. That’s what truly creates value. Apple’s acquisition of PA Semi is a good example of this. It has helped create the A-series processors, a major element of iOS devices that are the engine of growth for Apple. Apple has made several other small deals that have helped it strengthen the iOS ecosystem. Look at that and tell me as an investor whose acquisition strategy is more praiseworthy-Apple or that of the Googles, Microsofts, and Facebooks.

I’m amazed that you think Apple treats its shareholders as if they don’t exist. Evidently, you haven’t read about Google. For starters, Google’s founders control the majority of stock. In fact, Google has three classes of stock, Class A and B. The founders own Class B, which has ten times the voting power of Class A. They’re issuing a new class of stock called Class C stock, which has no voting rights whatsoever. In most other companies, stock that doesn’t carry voting rights is preferred stock. Preferred stockholders give up voting rights in exchange for precedence over common stockholders for dividend payments and priority over common stockholders in the event of bankruptcy. With this Class C stock, shareholders get no voting rights and no dividend preference. I can’t believe Brin and Page even had the gall to go to shareholders with the proposal. Tell me which company treats shareholders as though they don’t exist-a company that’s paying a good dividend and buying back stock or a company that not only refuses to do any stock buybacks or pay a dividend in spite of having a large cash balance but also taking away voting rights from shareholders but still wanting their money.

RonMacGuy

Don’t waste your breath on Constable. He spews his hate and never responds once others engage him. A true troll.

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