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Why Apple Is Falling Again: Bank of America Cuts AAPL From Buy To Neutral, Lowers Price Target

Tyler Durden's picture




 

Curious why after its massive drubbing yesterday, which led to the second highest volume day for AAPL stock in 2015, the phone market is down another 1.3% this morning? The reason: Wall Street's momentum chasing penguins have re-emerged, and moments ago Bank of America, right on time as in just after the stock broke its 200 DMA and entered a correction, decided to downgrade AAPL from Buy to Neutral, lowering its price target from $142 to $130.

The reasons for the downgrade from the report:

Long term winner but iPhone deceleration creates headwinds, move to Neutral 

 

Deceleration in iPhones creates near term headwinds

 

We downgrade shares of Apple Inc. (ticker: AAPL) to Neutral from Buy with a PO of $130. Although the long term opportunity is significant, we expect near term pressure on shares driven by (1) significant slowdown in revenue growth as iPhone growth decelerates and other initiatives like Apple Watch, Apple Pay, Apple Music take time to ramp, (2) China now accounts for ~25% of iPhone sales (C2Q) and share gains will be more difficult to come by, (3) the stock price is correlated to gross profit dollar growth (Figure 6), which despite the mix benefit of the iPhone will decelerate significantly over the next few quarters, (4) the magnitude of the beats is diminishing creating higher risk to negative revisions particularly as the Apple watch expectations are likely too elevated in 2016 , (5) the iPhone 6S/6S+ are likely to be an incremental upgrade (force touch), but not likely compelling enough for driving a significant change in the pace of share gains, and (6) we do not see incremental capital return announcements beyond the already announced plans in the near term. 

 

What about new products – Watch, Apple Pay, Music?

 

We model $0.30 EPS impact from Apple Watch in C2016 and $0.11 from Apple Pay. At its current ~10mn subscribers for Apple Music (not yet paying), the contribution will remain relatively small in C2016 at less than $0.10/share. Although the potential exists for each of these to become significant revenue drivers in the long-run, the short-to-medium term direction of the stock remains dependent on the iPhone.

 

Valuation always compelling; Momentum trumps near term

 

We do not dispute that valuation metrics remain compelling for Apple; however, in the last down-cycle despite compelling valuation the stock retraced 30%. AAPL stock has rallied 40% in C14 (vs. S15INFT up 18%), and is trading at multiples at a slight discount to peers.

 

Where could we be wrong?

 

PO moves to $130 Stronger than expected share gains of iPhones from Android, or increased enterprise penetration could drive upside relative to our model. Reacceleration in iPad sales could offset some of the iPhone decline, but with lower margins. Our new PO of $130 is based on 13x C2016 EPS of $9.99.

 

* * *

 

iPhones can continue to gain some share but expect some speed bumps

 

The iPhone remains a major driver of the company’s revenue (66% in F2015E) and operating profit (~85% in F2015E). While the iPhone 6/6 plus represents a super cycle, in our opinion, demand is being pulled in from the next year, and we see the December quarter of 2014 as the peak shipment quarter for iPhones until the potential iPhone 7 release in Sep 2016 (likely with force touch, dual rear cameras).

 

 

Importantly, China accounted for ~26% (est.) of total iPhone sales in the June quarter. On a
y/y basis this is significant growth;  however, market share trends are easing after 3 quarters of gains. Given the upside in iPhone estimates largely depends on new users, we see incremental risk to units in the near term.

 

 

The iPhone sales over the past 3 quarters combined with the replacement rates (see above)
suggest that there was a significant acceleration of replacements driven by the iPhone 6/6+, which has since tailed off sharply, offset by very strong new user adoption. See our detailed analysis of this here: “A detailed look at the iPhone installed base”.
The stronger new user growth is bullish overall (installed base grows larger over time) but also makes the quarterly sales more volatile. We view this latter dynamic at significant risk given the headwind being created by the stronger dollar, and broader economic uncertainty which can lead to lower sales from large markets like China.

In short, fears over China's dramatic mood swing (where there has been nothing substantially new in the past 2 months and if BofA really cared it could have released this report back in late June when we said the Chinese market crash would impact AAPL sales and its stock price shortly), and concerns the momentum shift will become self-reinforcing, once again confirming that even for such a "fundamental" case as AAPL, only the abundance of greater fools matters.

 

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Wed, 08/05/2015 - 07:16 | 6392615 VinceFostersGhost
VinceFostersGhost's picture

 

 

I think I must be the only person in the world that still uses a Samsung.

 

It cost me 96 cents at Sams.....I'm not real big on spending money.

 

When I spend big money....I typically buy physical gold.

Wed, 08/05/2015 - 07:24 | 6392630 Headbanger
Headbanger's picture

Love my old Samsung Galaxy One tablet I bought used years ago.

Fuck AAPL for screwing me out of upgrading an iPad One I got used too.

Can't do shit with it now but can still upgrade everything  on the old Samsung.

Wed, 08/05/2015 - 07:34 | 6392650 negative rates
negative rates's picture

When the gvt becomes the greater fool, then there is NO greater fool.

So looks as if you can't fool all the people all the time, now can you Mr. Gvt?

Wed, 08/05/2015 - 07:49 | 6392660 Creepy A. Cracker
Creepy A. Cracker's picture

Well, at least Amazon is still booming based on NEVER earning a profit.  Apple, with great profits and a P/E of around 12 is plummeting. 

 

Black is white.  Up is down.

Wed, 08/05/2015 - 08:12 | 6392750 NidStyles
NidStyles's picture

So my five year call before APPL death was likely correct. Good to know.

Wed, 08/05/2015 - 08:56 | 6392896 Wild Theories
Wild Theories's picture

I still have Apple's headquarter competion date down in my diary as a potential hubris-top to watch.

Wed, 08/05/2015 - 10:20 | 6393201 Consuelo
Consuelo's picture

The Silicon Valley's modern day 'Panopticon' isn't even close to being 'completed'.    And you can bet that any sustained drop in Apple share price past 90 days will see construction on that project grind to a halt.    That company could easily find itself in the wildnerness again, just as it was in the mid-late 90's.   It only takes a series of bad decisions.

 

 

Wed, 08/05/2015 - 08:00 | 6392708 XAU XAG
XAU XAG's picture

Sir Isaac Newton: The 
Universal Law of Gravitation
 

And a Apple gave him the idea

 

Dumb calling a firm APPLE, as what goes up must come down

 

Under a long enough time frame an apple falls to ground ZERO!

Wed, 08/05/2015 - 09:24 | 6393001 zeronero
zeronero's picture

Your logic explains why you're poor. And have to buy 96 cent phones.

Gold is not an investment. It's jewellery.

Wed, 08/05/2015 - 12:52 | 6393855 The Delicate Genius
The Delicate Genius's picture

gold is a hedge, damn you.

Or maybe you think the dollar is going to gain purchasing power as a result of all the printing and debt and fuckery?

Wed, 08/05/2015 - 07:12 | 6392617 wmbz
wmbz's picture

What?

Has BOA just blasphemed!

Wed, 08/05/2015 - 07:20 | 6392625 1stepcloser
1stepcloser's picture

When will a downgrade happen before a stock takes a shit?  Ahhh never

 

Wed, 08/05/2015 - 07:35 | 6392653 buzzsaw99
buzzsaw99's picture

heh heh

Wed, 08/05/2015 - 07:39 | 6392665 VinceFostersGhost
VinceFostersGhost's picture

 

 

Absolutely no upside in that crap.......I'm not doing it.

 

Remember 2008? Jim Cramer is still here.....nuff said.

Wed, 08/05/2015 - 07:37 | 6392658 SHRAGS
SHRAGS's picture

If it bounced, they would have published the positve report instead.  

Wed, 08/05/2015 - 08:03 | 6392715 DavidC
DavidC's picture

I will not be surprised in the least if it bounces today.

DavidC

Wed, 08/05/2015 - 07:38 | 6392661 CheapBastard
CheapBastard's picture

I bet they're going to downgrade WaMu also soon. BOA is really on the ball!

Wed, 08/05/2015 - 07:38 | 6392663 Arnold
Arnold's picture

Can't piss off all your clients at once and survive.

Just the Headline grabbers once in a while.

Wed, 08/05/2015 - 08:16 | 6392760 Refuse-Resist
Refuse-Resist's picture

BTMF!  JUST BUY!

Wed, 08/05/2015 - 10:42 | 6393259 silverer
silverer's picture

These days, truthful downgrades result in criminal investigations and charges by the Justice Department.

Wed, 08/05/2015 - 07:21 | 6392627 bmr22
bmr22's picture

I bought me a nice LG when Radio Shack was going under, less than 20 bucks made me feel oh so good to save hundreds of dollars.

Wed, 08/05/2015 - 08:02 | 6392711 samcontrol
samcontrol's picture

in Argentina an i shit runs close to $1500.

Wed, 08/05/2015 - 07:23 | 6392628 buzzsaw99
Wed, 08/05/2015 - 07:27 | 6392632 Dr. Engali
Dr. Engali's picture

Meh, Cramer says buy, and when Cramer talks people listen. Hmmm, where have I heard that before?

Wed, 08/05/2015 - 07:24 | 6392633 Racer
Racer's picture

And on that downgrade AAPL will no doubt have a big dead cat bounce and suck some more buyers in

Wed, 08/05/2015 - 07:39 | 6392664 silverer
silverer's picture

Yes, we may see that.  I told a friend holding APPL for years to set a stop loss.  In fact, I told him 125, but he didn't take my advice.   So if there's a bounce I'll tell him once more to sell, but I'll bet he doesn't (...because it can keep going up!).  That's where the "suck some more buyers in" activates.

Wed, 08/05/2015 - 07:34 | 6392638 JustObserving
JustObserving's picture

China is  a huge market for Apple but now under threat due to China's stock market troubles, suspicions that US was short selling the market,  and generally due to rising tensions between US and China

Apple IPhones Sales in China Outsell the U.S. for First Time

April 27, 2015 

http://www.bloomberg.com/news/articles/2015-04-27/apple-s-iphones-sales-...

But after losing $3 trillion in the markets, and with their wealth frozen, a hundred million Chinese no longer need an iPhone.

Wed, 08/05/2015 - 07:48 | 6392674 VinceFostersGhost
VinceFostersGhost's picture

 

 

suspicions that US was short selling the market

 

Well yeah....but we're giving them cheap gold. What the hell are they bitching about?

Wed, 08/05/2015 - 08:03 | 6392717 samcontrol
samcontrol's picture

also over $1000 in China.

Wed, 08/05/2015 - 10:38 | 6393246 silverer
silverer's picture

What's that word? Gouging, isn't it?  And while the iPhone is open for all to see on Chinese assembly lines, we have the Chinese engineers and capitalists saying "We can do as good or better for half the price".  Nice work Apple.  You gave them the tech AND the incentive to go around you.

Wed, 08/05/2015 - 13:04 | 6393928 The Delicate Genius
The Delicate Genius's picture

imagine that - a US tech corporation affected by the broader economic etc. environment...

what a bunch of hacks!

Wed, 08/05/2015 - 07:28 | 6392641 overmedicatedun...
overmedicatedundersexed's picture

being a book reader and such and luddite..why does apple want programs on my PC? I delete them when I find them..they just slow the pc down. I use unoffical software to run this pc, is that bad?

Wed, 08/05/2015 - 07:33 | 6392644 silverer
silverer's picture

Since Steve has departed the world, Apple is now just another company.  I think right now if he could come back, he's fire a few people for what they are putting out the door.   Apple thinks their phones are so wonderful, it's just a matter of time before they sell everyone in China an iPhone, but that's simply not true.  Apple is now being outsold by one of the Chinese companies, Xiaomi.  So when I looked into it, I found this link, and it kind of blew me away.  It seems that capitalism is alive and well in China after all, and the products and quality from several companies are pretty darned good!  And the prices are also good: 

http://www.phonearena.com/news/Best-Chinese-Android-smartphones-2014-edi...

Good luck Apple.  (Note, link above says 2014, but opens to a 2015 article)

 

Wed, 08/05/2015 - 08:08 | 6392738 RiverRoad
RiverRoad's picture

Looks like good old "industrial old age" for Apple.

Wed, 08/05/2015 - 08:25 | 6392791 pods
pods's picture

"Hey I got a great idea. We can ship all our manufacturing to China and make a killing.  We just need to do a tech transfer and............."

Sleep with dogs, wake up with fleas.

Of course, we all have fleas, but Apple seemed to walk around like it wasn't a flea ridden mutt.

pods

Wed, 08/05/2015 - 07:40 | 6392668 The Wedge
The Wedge's picture

Apple is probably getting closer to market saturation than it appears and a touch of big flop-itus with the apple watch. The watch is hitting Best Buy later this month and may give it a brief bump but it looks like the watch was big mistake not to mention they got nothing new, just regurgitated products.

Wed, 08/05/2015 - 07:44 | 6392670 BrokusDickusMaximus
BrokusDickusMaximus's picture

BlackBerry. Why do you think the gov uses them? Z10 works like a champ!

Wed, 08/05/2015 - 18:31 | 6395171 Abbie Normal
Abbie Normal's picture

Unless you have an orphaned Z10 on T-Mobile, which I did.  Recently switched to a carrier with the Z30, which is what the Z10 should have been in the first place.  And the upgrade to BBOS10.3 means the app world of android is now officially open to BB users.

Wed, 08/05/2015 - 07:50 | 6392676 BrokusDickusMaximus
BrokusDickusMaximus's picture

Fat fingered that one.

Wed, 08/05/2015 - 07:50 | 6392678 commishbob
commishbob's picture

I told a friend of mine back in early July when AAPL had dipped to $120 or so to consider selling at least part of his stake or, if he was feeling frisky, hold on and hope it cracks $130 again and then dump.

As everyone here knows, it hit $130+ just a week later. He didn't sell because "it was going to $160." I said I appreciated his optimism, but if it fell back to $120, it was def time to bail.

Saw him again today. Of course he didn't listen. He then told me he picked up more yesterday, because it's still going to $160 (because the guy on NPR said so). 

I don't claim to be an oracle of any sort (usually fading my action is sure bet), but some things are just too obvious. 

Wed, 08/05/2015 - 07:53 | 6392684 Smegley Wanxalot
Smegley Wanxalot's picture

NPR = chinese hair dresser.

Wed, 08/05/2015 - 08:18 | 6392766 Refuse-Resist
Refuse-Resist's picture

NPR= Bi-racial gay shoe shine boy out of DC.

Wed, 08/05/2015 - 08:05 | 6392724 samcontrol
samcontrol's picture

I think you think trading still works, but it is dead.

Wed, 08/05/2015 - 08:11 | 6392742 VinceFostersGhost
VinceFostersGhost's picture

 

 

If it moves you can trade it.....if it's not working one way.....just go the other way.

 

Turn off the TV....that's usually a good first step.

Wed, 08/05/2015 - 07:52 | 6392682 Smegley Wanxalot
Smegley Wanxalot's picture

so ... no more fAAPL for the wankstains who suck the worms out of this iShitter stock.

Wed, 08/05/2015 - 07:57 | 6392703 ZippyBananaPants
ZippyBananaPants's picture

Apple down and Disney getting crushed. Yet DOW futures up?

Wed, 08/05/2015 - 08:00 | 6392709 Chad_the_short_...
Chad_the_short_seller's picture

aapl is down, dis is getting hammered but the fut's are flying. Ah, the casino

Wed, 08/05/2015 - 08:05 | 6392725 RiverRoad
RiverRoad's picture

Hedge funds are dumping Apple because they have to.  Put your crash helmets on folks.

Wed, 08/05/2015 - 08:08 | 6392737 Hughing
Hughing's picture

penguins

Wed, 08/05/2015 - 08:44 | 6392853 Wahooo
Wahooo's picture

Let's see, I should believe Apple or Squid Savings & Loan?

Wed, 08/05/2015 - 08:53 | 6392887 carbon
carbon's picture

NO SO FAST NAA, HERE IN ASIA , APPLE HAS ALL THE JONY COME LATLEY , THE PREDENDING  SOCIALCIMBER BRAINWASH TO BUY ONLY  I FOOL PRODUCTS !

Wed, 08/05/2015 - 09:19 | 6392979 Blopper
Blopper's picture

Poor Carl Icahn, has he gotten out already?

Wed, 08/05/2015 - 10:15 | 6393185 Consuelo
Consuelo's picture

When apples are ripe, they tend to fall from the tree.

 

 

Wed, 08/05/2015 - 10:58 | 6393307 Racer
Racer's picture

And look at that, right on cue from a downgrade by bankster of americrap AAPL  is up over  2%!

Wed, 08/05/2015 - 13:03 | 6393913 The Delicate Genius
The Delicate Genius's picture

I'm not sure about the watch, particularly at the price point...

http://www.theweek.co.uk/iphone-7/62138/iphone-7-13-new-features-for-bus...

But ultimately, the comparison is between phones and computers mainly.

the A9 processor is, I'll suggest, going to be a very good upgrade.

I'll leave it at that since I see the antifanboi sharks circling.

[sell my pretties, sell!!! drive her down to 105 for Daddy, will you?]

Wed, 08/05/2015 - 18:37 | 6395204 Abbie Normal
Abbie Normal's picture

How about we do you one better and wait for $75?

Thu, 08/06/2015 - 00:22 | 6396239 talisman
talisman's picture

Anyone remember the Walkman, the Razr, the iPhone??

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