Thursday, April 14, 2005, 05:55 pm
ATR analyst downgrades Apple despite strong resultsCiting concerns with slowing revenue growth and high investor expectations, American Technology Research (ATR) analyst Shaw Wu on Thursday weighed in differently than most, downgrading shares of Apple to "Hold" with a price target of $46.
In a research note obtained by AppleInsider, Wu said, "We continue to believe Apple remains the best-positioned to capitalize on the digital music opportunity with arguably the industry's most powerful and complete stack of hardware, software, and service."
Additionally, the analyst believes that Apple's core Mac business could re-accelerate with new product momentum and as more "switchers" convert to the Mac platform.
Despite these strong points, Wu downgraded his rating on Apple shares from "Buy" to "Hold" based on four key reasons:
First off, Wu said his firm is growing more concerned with Apple's slowing top-line growth, which he said is not being helped by lower than expected average selling price (ASP) trends in both the company's iPod and Mac businesses. While iPod unit sales were strong at 5.3 million, ASP declined 28% quarter to quarter, indicating stronger growth in lower cost products like the iPod shuffle. Moreover, the analyst noted that Mac ASPs declined 9% quarterly, pointing to a mix shift towards Mac mini and iMacG5, despite strength in PowerBookG4.
As a second cause for the downgrade Wu cited high investor expectations, which he believes will likely be met by a decreasing number of "big up side surprises" in the near future. While Apple upsided its earnings-per-share (EPS) guidance by 14 cents and revenue by over $300, ATR believes investors may not be happy with these results and may have baked future upside expectations into the company's stock price. "In our view, investors do not believe AAPL's guidance and have much higher unpublished expectations," Wu said.
ATR also believes increasing availability of Apple products to be potential sign of decreasing growth, not increased production.
As a final key reason, the firm pointed to Apple's top-line growth, which it says could potentially slow to 12-15% in fiscal year 2006, down from its current 70% year over year level. "As a result, we believe AAPL's trading multiple may compress," Wu said.
ATR said the weaker than expected HDD-based iPod sales could be slightly negative for microdrive and component players, including Agere, Marvell, Seagate Technology, PortalPlayer and Synaptics. However, the firm said better than expected iPod shuffle shipments could benefit SigmaTel, which supplies controller chips for the flash-based players.
While ATR lowered its price target on Apple from $50 to $46, the firm raised its estimates for Apple's next two fiscal years (FY). The firm bumped FY05 estimates from $1.10 to $1.31 and FY06 estimates from $1.25 to $1.45.
Out of the 5.3 million iPods shipped during Apple's March quarter, ATR believes 2 million were iPod shuffles, slightly above guesstimates from research firm PiperJaffray, which said that Apple likely shipped 1.8 million of the flash-based players.
Apple shares tumbled $3.78, or 9.2 percent, to close at $37.26 in Thursday trading on the Nasdaq Stock Market.