Analyst Sees Trouble Ahead for Apple

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Apple (NASDAQ:AAPL) received a mixed review on Monday from Pacific Crest analyst Andy Hargreaves, who kept his buy recommendation on the stock but lowered his target price from $670 to $645. According to Hargreaves, while strong demand for products will keep moving Apple ahead, the company’s gross profit per unit has “likely peaked”.

According to the analyst, higher manufacturing costs for the iPhone 5 will push Apple’s overall gross margin down for the December quarter.

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Why Did Pacific Crest Cut its Price Outlook on Apple?

The analyst wrote in his research note that the cost of goods sold for the iPhone 5 in the December quarter will rise to $370 from $353, which will bring the gross margin for the phone down to 38.8 percent from 40 percent. That meant that the analyst’s earnings per share forecast for Apple for the quarter dropped to $14.76 from $15.28. For all of fiscal year 2013, the EPS estimate was cut to $51.49 from $53.36.

“Declining gross profit dollars per iPhone and volume sales of iPad are driving lower gross profit per unit of Apple product sold,” Hargreaves wrote, adding that “exceptional unit volume [was] required to maintain growth at Apple.”

How Will This Affect Apple’s Stock?

According to the analyst, from 2007 until the second quarter of this year, iPhone unit growth and margin expansion were responsible for driving Apple’s gross profit per unit to $290 from less than $150. The rise in gross profit per device has led to about a third of Apple’s total gross profit growth over that time. However, in the third quarter, gross profit per unit fell for the first time since the iPhone was introduced, and that measure, the analyst said, may drop further through the end of the 2013 fiscal year.

Hargreaves is predicting a negative development for Apple, but it is important to note that he prefaces his argument by noting the company’s rapid growth over the last few years and that he continues to recommend the stock.

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