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Wednesday, September 28, 2005, 03:05 pm PT (06:05 pm ET)

ML downgrades Apple on fears of declining growth

While acknowledging that Apple's execution has been "extraordinary," Merrill Lynch on Wednesday downgraded the company's stock from "Buy" to "Neutral," saying it sees more limited upside from this point forth.

After analyzing the Apple's 2007 earnings scenarios, Merrill Lynch found Apple stock to be fairly valued at its current $50 to $60 range. The firm also believes Apple's revenue growth will begin to slow within the next 1 to 3 fiscal quarters.

"We believe iPod penetration into the consumer PC installed base can go higher than the current estimated 16% but worry the stock appears to be pricing in penetration closer to 40% around 2007" analyst Richard Farmer wrote in a research note obtained by AppleInsider. He believes this figure to be reasonable but unlikely to be exceeded.

Farmer also waved caution at the upcoming Intel transition and launch of Microsoft's Vista operating system, two events that could possible hold back buyers and prevent Mac market share gains.

"When everyone knows everything is going right for a company, sentiment is hard to improve," wrote Farmer.

The downgrade on Apple is the first in many months, as the iPod maker's stock has recently become a Wall Street favorite, trading at all-time highs.

Shares of Apple traded down some 4.42% or $2.36 this afternoon to close at $51.08.