Apple’s Stock Downgraded on iPhone Subsidy Concerns

| Apple Stock Watch

ElppaWalter 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.

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Ross Edwards

OK thanks now I can get some more AAPL at a discount if the share price takes a dip in response to this rating.  Preeeetty sure this doesn’t have the kind of long-range implications for Apple that Piecyk suggests.

Carriers are getting around $30/month for DATA ALONE from all those hundred million subscribers among them… and that’s current cash flow at a 12-turn rate at a 99% profit margin, after capital equipment costs.  That’s not counting the normal subscription costs they get from all phone users smart or dumb.


Oh wait - let me get out my crocodile tears !! Boo hoo ! Poor carriers (sniff)

Apple invented and produces the iPhone. Carriers, well - they’re carriers. If any carrier wishes to no longer offer iPhone then I’m sure they can arrange it. Let me stand aside so as not to be run over in the rush to the exit.

Bryan Chaffin

One Mark Hahn e-mailed me the following comment. It’s so fantastic, I thought it should be seen by all:

What a duffass, sure effected the stock in a down market. yet you hang an upside down Apple. Go back to your highschool Newspaper if they would have you


So let’s see if I can follow this line of reasoning:

1) The iPhone is so popular with consumers that carriers that didn’t carry the iPhone were losing subscribers to competitors.

2) This led to carriers to pay a steep upfront price to Apple in the hopes that this would a) lower the number of defections; and b) get more subscribers; make more money from two-year contracts and data fees.

3) This strategy has worked at Verizon, AT&T and Sprint.

4) So his conclusion is that the carriers will now want to sell fewer iPhones because they don’t want to pay up front subsidies and because…they want to reverse all of the good things that those upfront subsidies gave them?

5) Say what now?


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.

Okay. Let me see if I got this straight. Carriers are supposedly CURBING their “aggressive upgrade policies”, with an example of AT&T allowing iPhone upgrades SOONER than their contracts call for, and this is going to DECREASE iPhone sales?

Which Droid phone maker pays this “analyst” to think?


I do not know where you graduated from.if you tell me I can cask my bothers and cousins to skip that University.What a whimsical analysis.He is doing this for a while.His previous issue was the PATENT. Now what?????


I’m 21 months into the 24-month contract and AT&T will “allow” me to upgrade for the new price. That happened at 20 months. The days of 14-month upgrades are long gone. It used to be so, but not now. And ETFs went way up too.


Try the following ...

Walk into your local AT&T and Verizon store. Count how many phones there without an AT&T or Verizon logo.

Does this sound like “stick to their guns” ??

It’s critical thinking like this that has made Wall St. such a mess.


FYI, in India the iPhone 4s is available for around 900$ and not 600$ and with no device subsidies available. And you are right on the fact that most subscribers are prepaid. Wonder how many would pay such a huge premium without subsidy. Seems both apple and operators here are not aggressive enough to push it

Bryan Chaffin

Okay. Let me see if I got this straight. Carriers are supposedly CURBING their ?aggressive upgrade policies?, with an example of AT&T allowing iPhone upgrades SOONER than their contracts call for, and this is going to DECREASE iPhone sales?

To clarify, Zew, allowing upgrades 14 months into a 24 month contract is an example of aggressive upgrade policies that the analyst believes are being curbed. In other words, he thinks such policies will be changed, forcing customers to wait a full two years (or at least more of those two years) before they can get a fully subsidized upgrade.


in India the iPhone 4s is available for around 900$

Apple will have trouble selling $600-$900 phones abroad and they know it.

First, they are partially addressing this issue by selling the iPhone 3GS and iPhone 4 for ~$350 and ~$450 respectively. This is an unsatisfying answer in some markets.

Second, Apple is able to sell the phone at full price in an astounding number of places. China, for example.

Third, sometimes it’s best not to compete in certain markets. As much as Apple would like to be the market leader in India, they should not sacrifice their profits and their business model to make it so.

This analyst - like so many analysts before him - insists that Apple needs to lower its prices to be successful. You would think that Apple’s becoming the largest company in the free world would suggest to those analysts that a) they are wrong and b) Apple doesn’t need their advice.

some internet dude

It almost sounds as if the Carriers are realizing that the iPhone is loosing its cache and Android is where its at.


It almost sounds as if the Carriers are realizing that the iPhone is loosing its cache and Android is where its at.

It’s saying exactly the opposite. The Analyst is saying that the iPhone is too popular, that it is commanding too much of a subsidy and that something has to be done to stop it.


Apple stock price is worth every penny, That?s if you are smoking the right stuff.

The insanity of the speculative markets continue to be cheered by deceptive advocates who have made fortune but don?t acknowledge the actually cost to the United States future which is likely to see a declining standards of living in the year ahead . This is all done for a cause, so that a handful of people can make their billions by manipulating the stock market to show an illusion of prosperity returning to the economy. 

The analysts who are projecting Apple stock to reach $1000 a share are the likely the same expletive, which made though wonderful forecasts about similar bubble stocks during dot com bust. 

I would have like to use the actual word which best describe these analysts, but I probably would be censored. 

The rapid rise in apple stock price has nothing to do with current earnings but is based solely on speculative growth with GREAT EXPECTATIONS that sales growth will increase by 20% annually or more for the next five years.  This is why the cheerleader believes apples stock is significantly undervalued even though it has increased by over 250% in the less than 2 years. 

If apple stock price continues to increase, don?t jump for joy.  The continually increase is nothing but herd investing which has caused apple?s stock to increase by 56 % since the beginning of the year. 

It was not long ago the herd believed that house prices could never go down but would continue to increase rapidly year over year.  Just as the apple cheerleaders believe its stock price cannot decline, but will continue to increase.  As long as the herd believes the fairytales being promoted in regards to Apple?s sales growth its stock price will increase.  As soon is its earnings and net income do not meet the ridiculous expectations it will drop.



Apples 2011 net income is reported to be 26 billion on revenues of 128 billion.  This is a 185% increase from Apple?s 2010 net income which was 14 billion.  A good majority of Apple earnings came in the 4th quarter, I.E holiday season when it s gross earnings increased by about 18 billion from the previous quarters to over 46 billion.  Unbelievable wouldn?t you agree?

The herd believes that Apple can expand it sales by 20% a year for the next 5 years is a deception.  To accomplish this apple sales will have to increase to 153 billion in 2012 and by 2016 and have annual sales of 318 billion. 
I don?t know how the herd can believe this fabrication.  I guess they are smoking some good dope. 

Based on last year revenue and the prediction that sale will increase by of 20%, Apple?s net income will not exceed 40 billion in 2012.  Apple?s net profit is approximately 20% based on 2011 earnings and net income. 

  Sales ? cost of goods sold / sales = net profit
    128 billion ? 102 billion / 128 billion ? 20 %

2012 revenue if sales increases by a 20%.
    128 billion X 1.20% ? 153 billion

2012 estimated Net Income from gross sales.
        153 X 20% ? 31 billion

Every additional billion of net income will be more difficult to earn, due to its enormous size which is 1000 million.  If the analyst?s 2012 forecast are correct Apple?s revenue will increase by 25 billion or 25000 million dollars.  This amount of money buys quite a few Ipads, downloads and other apple products.  How many more apple product can the market absorb?   

By comparison NASA Space Shuttle operating budget in it last year was 3 billion.  I provide this as an illustration, to give the cheerleaders a clued about the staggering amount of income apple currently has.

Apples net income from the past five years, from 2007 to 2011 is approximately 56.5 billion.  A major jump in sale and income came in 2010 to 2011 when its net income increased by 11.91 billion.

What is never asked is how a company with a net income of 26 billion in 2011 can have achieved a market capitalization of 590 billion.  I realize there is a difference between market capitalization and the use of a capitalization rate to determine value.  However, market capitalization is a qualitative value not easily determine as it represents the public consensus on the value of a company’s equity and in Apple?s case it has been inflated.


cannot finish comment.  Full commentary can be read at


Ade: sure - the current growth can not be sustained forever. But it has a while to run. Not in the U.S.  although there will still be some growth, but countries such as China. As long as Apple shows reliable growth, its share price will rise. If earnings flatten, the share price will also.

You puzzle about Apple’s capitalization. Remember - Apple’s present capitalization is not the highest-ever company capitalization. The market doesn’t determine capitalization directly, just the share price. And it sets the share price based upon EPS and expectation of future earnings. All the market is saying is that it expects Apple to continue strong earnings growth for a while, where “while” is poorly determined, I’ll grant.

Highest-ever was Microsoft, I understand, and look where it is now. Still substantial but a lot lower than Apple. That’s because its share price is down (about 50% of its max). One can speculate about why but that’s not today’s discussion.


Contrary to what this analyst is saying, Apple seems to have little problem selling expensive iPhones and iPads in China. iOS penetration rate reaches 10% in Beijing and Shanghai:

iOS penetration in Chinese cities and provinces

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