2 Reasons Why Apple Was Back Below $400 Billion

The daily Street analyst drama surrounding Apple (NASDAQ: AAPL  ) shares continues unabated. After a rebound rally yesterday to reclaim the $400 billion market cap threshold, shares woke up to selling pressure first thing in the morning. At the morning's low, the iPhone maker broke back below that $400 billion valuation by a hair.

There were two clear reasons for the investor pessimism in the form of analyst downgrades.

A first opinion
First came Berenberg, which downgraded its rating on Apple by two notches. What was previously a buy has gone straight to "sell" in Berenberg's opinion. Analyst Adnaan Ahmad believes that smartphone plays are no longer an attractive investment, following three years of healthy growth. Ahmad makes comparisons to what happened in the broader handset industry 10 years ago. In that case, unit volumes peaked in developed markets and companies subsequently found growth in emerging markets.

The challenge is that emerging markets represent lower-price segments of the market, which has the potential to squeeze margins due to the reduced pricing power. The analyst predicts that Apple's gross margins will fall from the 45% to 50% level down to roughly 35% over the next three years. Notably, Ahmad also cut his rating on Apple's archenemy Samsung.

He sees both companies peaking and future growth coming from margin-dilutive sources, which will contribute to fundamentals throughout the industry deteriorating. This effect will subsequently trickle down through the supply chain as OEMs look to preserve margins by reducing component costs.

Berenberg similarly has sell ratings on other smartphone component plays, including Imagination Technologies, Qualcomm (NASDAQ: QCOM  ) , and Foxconn International, among others. Those three companies all happen to be Apple suppliers in some form or fashion. Apple licenses mobile GPU designs from Imagination, buys basebands from Qualcomm, and Foxconn does the assembling.

Surprisingly, Berenberg separately reiterated a buy rating on ARM Holdings (NASDAQ: ARMH  ) , another smartphone supply chain pick that also provides processor IP to Apple. This is notable because I've long questioned ARM's monetization and role in the value chain relative to some of its licensees like Qualcomm, who add more value in the supply chain. Qualcomm also just boosted its dividend and buybacks on the fundamental strength of its business.

ARM's valuation is a little frothy at the moment and I think it's gotten ahead of itself, even as it tapped a fresh 52-week high yesterday. If you compare the three, Qualcomm and Apple offer much more attractive valuations.

AAPL P/E Ratio TTM Chart

AAPL P/E Ratio TTM data by YCharts.

This is why it's peculiar to rate them both at "sell" while ARM earns a buy rating.

A second opinion
Citi also chimed in with negative news. The investment bank is keeping a neutral rating on Apple, but has toned down its price target from $500 to $480 after reducing its estimates on iPhone and iPad sales in the near term. The 9.7-inch iPad is seeing demand fall, which Citi believes is a result of tablet market share loss.

The analyst believes that Street estimates for iPhone unit sales over the next two quarters are too high. The consensus currently calls for 37 million and 32 million iPhone units over the next two quarters, respectively. Citi slightly reduced its estimate for the current quarter from 35 million to 34 million, while keeping its estimate of 25 million units next quarter. Both of those estimates are below consensus.

The challenge with these estimates is that the timing of Apple's product cycles is largely unknown right now. The iPad may see a refresh within months, but no one knows for sure. Likewise, the iPhone is expected to see an earlier launch this year (June or July) relative to last year (September). New product launches reinvigorate unit sales and if Apple announces a product launch, don't be surprised if all the Street analysts that have been ratcheting down estimates in recent months scramble to re-up them.

The most undervalued stock in the universe
Opinion isn't entirely negative on the Street, though. Goldman Sachs still considers Apple a buy and thinks shares are headed to $660. Goldman even noted that Apple is currently the most undervalued stock within its coverage universe, based on current prices and its price target. Of all of those stocks on its radar, Apple has the most potential upside based on its modeling.

Once upon a time, there was a cheery consensus on Apple's prospects. These days, there is anything but consensus and these analyst opinions are just more evidence that the stock has become a battleground.

Concerned about Apple's plunge? We have expert advice for you.
Emotions aside, Apple's growth story is far from over, and the company still has massive opportunities ahead. We've outlined them right here in The Motley Fool's premium Apple research service, and it may give you the courage to be greedy when others are fearful. If you're looking for some guidance on Apple's prospects, get started by clicking here.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2503158, ~/Articles/ArticleHandler.aspx, 9/20/2014 8:11:14 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement