Apple Downgraded by Pacific Crest: What's Going On?

Apple AAPL is doing very well this year what it has always done in past years, i.e. creating hype for its next iPhone. It's actually been even easier this year since it is the tenth anniversary of the device. So shares have appreciated nearly 34% year to date.

But at least one analyst is unwilling to bet on the hype, setting aside all the historical evidence of Apple delivering the goods. Analyst Andy Hargreaves of Pacific Crest thinks it's not a good idea to further accumulate the shares because he considers Apple's valuation to be super-rich and the shares likely to be down $10 a year from now. He has therefore lowered the rating to "sector weight."

His second problem seems to be that investors are accounting for the positives but not considering the probable negatives related to the iPhone 8, i.e., what if demand isn't as strong as envisaged? Since this phone is expected to be much more expensive than the 7, the principle of elasticity of demand suggests it would generate lower volumes, wouldn't it?

Also, will the profit from the higher price be enough to make up for the amount lost due to lower volumes? And what kind of an impact would this have on the gross margin? He also expects that the specter of lower replacement rates and harder-to-win new customers would increase growth pressures in 2019.

With traditional markets more or less saturated and replacement rates also declining, Apple has started launching the iPhone simultaneously in a larger number of markets. This has added complexity to its product launch.

The analyst also mentioned possible supply chain risks. Note that Apple has been broadening its supplier base and ordering in excess of its projections in recent times to deal with this issue. But because this iPhone contains some components that haven't been procured before, the concern can't be ruled out completely.     

Apple shares carry a Zacks Rank #3 (Hold). But other technology companies like Maxlinear MXL, Broadcom AVGO, Arista Networks ANET, and Applied Materials AMAT are safer bets now because they all carry a Zacks Rank #1 (Strong Buy).

You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

More Stock News: This Is Bigger than the iPhone!

It could become the mother of all technological revolutions. Apple sold a mere 1 billion iPhones in 10 years but a new breakthrough is expected to generate more than 27 billion devices in just 3 years, creating a $1.7 trillion market.

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