Here's Apple's Biggest Concern (Update 1)
Updated from 7:32 a.m. EST to include more analysis from analyst in the seventh and 13th paragraphs.
NEW YORK (TheStreet) -- It's the first day of 2014, and Apple
Wells Fargo analyst Maynard Um downgraded shares to "market perform" from "outperform," citing pressures on gross margins, particularly driven by the new iPhone. He kept his price target range of $536 to $581, noting that while gross margins may see pressure, there are certain positive catalysts to come this year.
Apple shares were lower in premarket trading Thursday, down 0.96% to $555.66.
"Gross margins have decreased by an average of 225 basis points (bps) in the period following the launch of new form factor iPhones while increasing ~225bps in the two quarters following an "s" launch," Um wrote in a note. "With the secular story, in our opinion, largely over, we believe the stock may be more susceptible to trend with margins."
Apple launched the iPhone 5s and iPhone 5c in September, the first time the Cupertino, Calif.-based company has launched two versions of its popular smartphone.
Also pressuring Apple's rating is the fact that there may be a smaller amount of future opportunity for existing Apple products, including the iPhone, iPad and new Macs, as well as a shift of power from companies such as Apple, Samsung and other original equipment manufacturers (OEMs), back to wireless companies, such as Verizon
"Wireless operators have been offering generous subsidies of ~$400 per smartphone, getting the price to consumers to ~$250 in an effort to drive increased smartphone penetration," Um wrote in his note. "With 75%+ penetration in some developed countries (US), we fear subsidization may become less of a focus as operators switch to a focus on driving usage. While we do not anticipate an immediate value swing, we believe we could see further evidence of a shifting balance of power that could weigh on Apple shares."
Last month, AT&T CEO Randall Stephenson made comments at a UBS investor conference that perhaps the era of massive subsidies for handsets may be coming to an end, as the smartphone market matures, particularly in the U.S. "When you're growing the business initially, you have to do aggressive device subsidies to get people on the network," Stephen said on Dec 10. "But as you approach 90% penetration, you move into maintenance mode. That means more device upgrades. And the model has to change. You can't afford to subsidize devices like that."
Apple CEO Timothy D. Cook has made comments about subsidies in the past, saying that he's not too worried about them disappearing, as wireless providers want to offer the best products to their customers.