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Tuesday, April 22, 2008, 07:00 am PT (10:00 am ET)

AmTech downgrades Apple shares to Neutral on valuation

Investment firm American Technology Research on Tuesday cut its long-standing Buy rating on shares of Apple Inc. to Neutral, citing near-term concerns with the stock's valuation, high expectations on the part of investors, and a potential product vacuum ahead of the third calendar quarter.

"We are downgrading our rating on Apple shares to Neutral from Buy for four key reasons," analyst Shaw Wu wrote in a note to investors. "This was a very tough decision as we have been bullish on Apple for the past several years, watching the stock more than triple."

Specifically, Wu noted that shares are now trading at 32 times calendar year 2008 earnings and near his previously stated $175 price target. These levels are "not that compelling," he said, and warned of the potential for a 15 to 20 percent correction in the near term that could see the shares fall back to $135 to $140 levels.

"We are concerned that expectations may be too high with the stock rebounding over 45 percent in recent weeks," the analyst told clients. "While we believe Apple will report a strong quarter relative to guidance and published consensus estimates, we are concerned whether it will be good enough and whether investors will be as forgiving with conservative guidance."

Wu said he remains upbeat on the Cupertino-based company's product pipeline for the second half of the year, but said a dearth of product introductions leading up to that time could weigh on investor sentiment and thus the company's shares.

"Our supply chain checks indicate 3G iPhones will not likely ship in volume until July and new Macs until the September quarter, likely putting stress on the June quarter," he wrote.

Given the aforementioned data points, Wu said he would find it difficult to recommend that investors build their stake in Apple at current pricing. Shares of the company have historically been amongst the most volatile on the market, he noted, and recent trading suggests investors may be focusing too much on near-term results.

"Recall that in only the past year, Apple stock has been below $100, more than doubled to above $200 and fell more than 40 percent in less than two months to $115, only to move more than $50 to $168 in about seven weeks," he explained. "We find this trading action amazing and indicative of the trading environment despite Apple shares being arguably universally loved."

As such, Wu said he's taking a seat on the sidelines out of respect for this erratic trading history and his concern that near-term results and guidance may not be as robust as expected.

"As investors are clearly more focused on near-term results from Apple, we believe the stock has a good chance of underperforming from these levels for the next few months until investors again begin to focus on the future, and a robust second half pipeline of products," he wrote. 'At lower levels, we would be very inclined to build positions in Apple; however, we are in a market in which valuation matters, and we believe the stock at current levels is ahead of itself."

Shares of Apple were trading down $4.30 or more than 2.5 percent to $163.86 in morning trading on the Nasdaq stock market.