Walter Piecyk, an analyst with BTIG Research, issued a rare downgrade on shares of Apple Inc. on Monday, moving his recommendation from “Buy” to “Neutral.” In a research note to clients, Mr. Piecyk said that changes to aggressive carrier subsidy policies will result in fewer smartphone upgrades. He also expressed doubt about Apple’s ability to wrangle US$600 per iPhone in emerging markets where carrier subsidies are few and far between.
The analyst removed his 12-month price target of $600 on AAPL, a price the stock surpassed earlier this year, as the stock has risen more than 50 percent in the first three months of 2012. Other analysts have reacted by ratcheting up their own price targets for the stock to as high as $1,001.
We’ve been hearing concerns about Apple’s iPhone subsidies—which are the highest in the mobile handset industry—since the device was released. Apple retails its current iPhone model at $199, $299, and $399, but those prices are subsidized by carriers to the tune of hundreds of dollars per unit. Apple’s average selling price for iPhones during the Christmas quarter, for instance, was $659.
Ultimately, Mr. Piecyk’s downgrade wasn’t so much about Apple as it is about carriers. Carriers have used subsidies and aggressive upgrade policies to move customers over to iPhone and other smartphones. The idea is to reduce customer churn, lure new customers to the fold, and to have those customers buying expensive and lucrative data plans for their smart devices.
That strategy has worked, to a point, as Verizon, AT&T, and Sprint have all claimed increased customer numbers due to the iPhone. The problem for the carriers, though, is that profits haven’t followed the same tract, and certainly haven’t kept pace with Apple’s stunning increase in profits.
To that end, some carriers began announcing plans to curb their aggressive upgrade policies. For instance, while most subsidy plans are based on a two-year data plan, AT&T has allowed customers to upgrade their smartphones 14 months into that 24-month contract.
The analyst said he expects those carriers to stick to their new guns on this issue, and that the curbs will result in fewer iPhones sold in markets where carriers routinely subsidize new devices. He expects Apple to sell 4 million fewer iPhones in the U.S. than he had previously forecast.
“Even weak operators like Sprint, which has a large contractual commitment with Apple, will likely experience a decline in iPhone sales based in part on changes to its upgrade policies last year,” the analyst wrote. “They will not be alone as we expect a similar trend at Verizon, Deutsche Telekom, Vodafone, America Movil and Telefonica, to name a few.”
To counter this trend, Mr. Piecyk believes that Apple will have to turn to emerging markets to maintain iPhone growth. Many of these markets are pre-paid markets where carriers do not subsidize device sales. In these markets, “handset subsidies are a rarity and the $600 ASP (average selling price) of the iPhone represents a big chunk of a household’s monthly income.”
This has been another frequent refrain from some quarters predicting iPhone doom and gloom over the years. In China, one of those emerging markets, Apple has seen its sales grow faster than any other part of the world, and the iPhone has caused riots, food fights, and broken windows. It has also sparked a thriving gray market for the devices that persists even though the iPhone is now available from two Chinese carriers.
As part of his downgrade, the analyst predicted a revenue miss of $1 billion for Apple during the June quarter.
Shares of Apple reacted to the downgrade by rising to record territory. As of this writing, the stock was trading at $639.21, up $5.53 (+0.87%), on moderate volume.
*In the interest of full disclosure, the author holds a tiny, almost insignificant share in AAPL stock that was not an influence in the creation of this article.