Wells Fargo Downgrades AAPL Over Gross Margin Concerns

| Apple Stock Watch

Wells Fargo analyst Maynard Um may see a positive future for Apple, but that isn't stopping him from downgrading the company's stock from "Outperform" to "Market Perform" over concerns about its gross margins in 2014. His concern is that Apple's gross margin will see pressure thanks to the iPhone 6 and a power shift from handset makers back to cell service providers.

Wells Fargo sees lower groos margins for Apple with iPhone 6 launchWells Fargo sees lower groos margins for Apple with iPhone 6 launch

Mr. Um told investors,

While we still have conviction in the gross margin thesis (and the potential for iPad/iPhone unit upside), we believe this may be largely embedded into the valuation. From a positive catalyst perspective, we expect 2014 to be highlighted by new products (iPhone 6, iWatch, iBeacon) and an increase in dividends and/or share repurchases. However, we're concerned that 1) [gross margin] will come under pressure later this year in the iPhone 6 cycle, 2) there is limited amount of incremental market cap opportunity in the existing product segments Apple plays in (including the TV and watch opportunities) without material market share gains, and 3) the balance of power may start to shift back to wireless operators from handset vendors.

He said that Apple's gross margins show a consistent decrease of about 225bps when the company releases a new form factor iPhone like the iPhone 4 and iPhone 5, but increase by about the same amount when the "S" versions -- the iPhone 4S and iPhone 5S -- ship.

Carriers will likely start cutting back on subsidized pricing where market penetration is high, like in the United States. Instead, he sees carriers pushing services that drive usage which could scale back the number of smartphones sold. As a result, carriers will have a stronger position in the smartphone market compared to device makers, including Apple.

Concerns over what may happen to Apple's margins after the next iPhone launch, however, don't have Mr. Um worried about the just ended holiday sales period. He expects Apple will report strong quarterly iPhone, iPad Air, and iPad mini sales saying, "We forecast 24 million iPads and 54.8 million iPhones and note that every 5 million iPads equates to $0.37 in EPS and 5 million iPhones $1.10, all else equal."

Looking forward, Mr. Um does see Apple's product mix as a strength for the company with new devices in 2014 driving continued interest.

Mr. Um's "Market Perform" rating comes with a US$536 to $581 valuation range. Apple is currently trading at $553.96, down 7.06 (1.26%).

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Comments

vpndev

It’s time to reinstitute ADKC. Not as the “Apple Death Knell Counter” but as the “Analyst Death Knell Counter”.

And also keep track of the prognostications and rate them against reality six and twelve months later.

Constable Odo

Amazon’s share price will pass Apple this year and Google will probably reach $1500 a share.  Where will Apple’s share price be?  Stuck forever below $600 for every reason possible.  Tim Cook can do absolutely nothing for Apple except make the shares fall lower.  I can’t say anything negative about his running the company to produce decent products, but his financial managing skills leave a lot to be desired.  When a company with that much reserve cash can’t figure a way to increase revenue, then there is a definite problem.

Apple will never get past Android because it’s free and fully supported by Google for every device you can imagine.  Tim Cook is too stupid to realize this and needs to get Apple to expand into other markets where Android can’t go.  Mobile payments or cloud services would be advantageous for Apple to pursue.  There would be not competition from Android and those services would improve profit margins considerably.

vpndev

Dear Constable - I think you need to revisit your assumptions.

“When a company with that much reserve cash can’t figure a way to increase revenue”
It seems that you have not actually looked at Apple’s revenue charts. Had you done so, you would not have made the statement you did. BTW - that’s quite aside from the “reserve cash” issue, which is immaterial to revenue.

“Apple will never get past Android because it’s free…”
Dream on.

“and fully supported by Google for every device you can imagine”
I guess you’re in Colorado and partaking of the new-found freedoms there. Google supports what it chooses to support, and does not support what it chooses to not support. If you do not realize this then you are not paying attention.

“Tim Cook is too stupid to realize this ...”
You really lost it here.

“Mobile payments or cloud services would be advantageous for Apple to pursue”
Quite possibly. There is iCloud [although that might not be quite what you mean by “cloud services”].

“There would be not competition from Android ...”
You’re inhaling again.

Seriously - if this is the best you can do then it’s time to retire from the police force.

You could be an analyst and make a lot more money saying the self same things.

dswoodley

Constable Odo, you sir should stick to watching old episodes of DS 9. 

“When a company with that much reserve cash can’t figure a way to increase revenue”  Apple has consistently stated that they don’t engage in the “push shit out the door game just to make money” for the sake of making money.

“Apple will never get past Android because it’s free…”  Same thing, Apple doesn’t engage in market share expansion just for the sake of gaining market share.

“and fully supported by Google for every device you can imagine” yes, for about a year or so if your lucky.  A freebie Android phone I got less than year ago will no longer be receiving updates I’m told by the OEM.

“Tim Cook is too stupid to realize this ...”Tim Cook has managed the company from being a $200 billion dollar company to a $400 billion company (admittedly down from a $500 billion company).  Tell you what, when you get a company that makes just $1 billion, I’ll listed to your criticisms.

“Mobile payments or cloud services would be advantageous for Apple to pursue.”  Have you not heard of iBeacon or iCloud?

Seriously, your comments are nonsense man. 

RonMacGuy

Wow Odo, you actually make me miss Bosco. Not that he was any more right about things than you are (both equally wrong most of the time) but at least he had some level of intelligence about his approach. I would hold you to your ignorant predictions a year from now, but that seems to be frowned upon at TMO. Plus you don’t seem to have the guts to respond anyway when someone questions your comments. A true troll. Lol.

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