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Apple: Whoa! BTIG Analyst Cuts Rating To Neutral From Buy

This article is more than 10 years old.

Well, you don't see this happen very often.

Citing concerns about the growing toll subsidies are taking on wireless carriers, BTIG analyst Walter Piecyk this morning cut his rating on Apple to Neutral from Buy. The analyst note that the move comes despite the fact that he thinks the company will report a blow-out March quarter: he's looking for revenue of $40 billion and profits of $10.75 a share, well ahead of the consensus at $36 billion and $9.81. His view is that investors should "take a breather during the expected strength of this quarter," given some potential trouble ahead.

Of the 54 analysts following Apple tracked by Thomson/First Call, just 5 rate the stock a Hold, while just 2 rate Apple Underperform or Sell.

Among his concerns:

  • The changing dynamics in the post-paid wireless industry, which has seen margins squeezed by the frequent upgrade activity of iPhone customers.
  • The sustainability of a $600 iPhone and possible need for a price cut.
  • The elevated expectation that the company will deliver another revolutionary product into the market.

Piecyk writes in a blog post that he expects post-paid wireless operators  "to remain firm in their plan to stunt the pace of phone upgrades in 2012 and we expect to see some initial evidence of their success in the current quarter."  The analyst contends this will increase the need for Apple to grow its business in the pre-paid dominated emerging market space, "in which handset subsidies are a rarity and the $600 ASP of the iPhone represents a big chunk of a household’s monthly income."

The analyst concedes that his thesis will not be on display in the current quarter, "as the pent up demand in China and the launch of the iPhone in 30 additional markets is likely to drive strong sales that will offset the sequential declines in other markets." He thinks the company sold 33 million iPhones in the fiscal second quarter ended March, but he expects a drop to 27.5 million in FY Q3, which would means revenues $1 billion below current consensus.

"We continue to maintain our view that Apple is the primary beneficiary of an accelerating growth trend in the global adoption of smartphones, considering global penetration of smartphones has not yet even reached 30%," the analyst writes. "However, given the run up in Apple’s stock and the consensus estimates, we think now is a good time to more carefully consider how it will capitalize on the next and likely much larger leg of growth in the industry and prepare for the inevitable bumps that may occur on the way."

In particular, he thinks subsidy cuts are coming, and soon.

"Subsidies by post-paid wireless operators have fueled the growth of Apple’s $600 iPhone since its inception," he writes. "Even in the pre-paid dominant markets of China and Europe, heavily subsidized iPhone’s are available to users willing to sign up for a contract. Wireless operators have been happy to subsidize smartphones to new and existing customers in order to provide a lift to the average monthly bill of their customer base, a metric which had been falling for the past three decades."

"The positive inflection point in ARPU was cheered by investors but the cost to drive that ARPU accretion is now starting to eat away at profitability and the performance of those stocks.  Operators, unwilling to stall the pace of ARPU growth, offered generous upgrade policies including some that enabled a fully subsidized phone upgrade only one year in to a two year contract.  We expect those policies to change as the faster upgrade rate of smartphones compared to legacy feature phones has been a costly surprise to post-paid and pre-paid operators, alike."

AAPL this morning is down $8.43, or 1.3%, to $625.25.