Wells Fargo Securities has downgraded its rating for Apple stock from "Outperform" to "Market Perform," a new memo to investors reveals. The firm says that its earlier, more optimistic forecast was based on an expanding profit margin, driven mainly by the iPhone 5s. "While we still have conviction in the gross margin thesis (and the potential for iPad/iPhone unit upside), we believe this may be largely embedded into the valuation," the memo comments. Share prices are still forecast to sit within the $536-581 range.
"From a positive catalyst perspective, we expect 2014 to be highlighted by new products (iPhone 6, iWatch
) and an increase in dividends and/or share repurchases," the memo continues. "However, we're concerned that 1) GM will come under pressure later this year in the iPhone 6 cycle, 2) there is limited amount of incremental market cap opportunity in the existing product segments Apple plays in (including the TV and watch opportunities) without material market share gains, and 3) the balance of power may start to shift back to wireless operators from handset vendors."
Wells Fargo argues that holiday sales were probably strong for Apple, fueled by iPhones and iPads. The firm's estimates include 54.8 million iPhones and 24 million iPads. Every 5 million iPhones is said to add another $1.10 to earnings per share, while every 5 million iPads is said to add $0.37.