Conventional wisdom on Wall Street has it that eventually (and possibly as soon as the end of this year) Apple’s stock price will reach over $1000 a share, largely fueled by the iPhone. But one Wall Street analyst isn’t nearly so optimistic. In fact, BTIG Research analyst Walter Piecyck is downgrading his recommendation on Apple stock from “Buy” to “Neutral…” and his reasons actually make a lot of sense.
“We continue to maintain our view that Apple is the primary beneficiary of an accelerating growth trend in the global adoption of smartphones, considering global penetration of smartphones has not yet even reached 30%,” Piecyk wrote to clients this morning. “However, given the run up in Apple’s stock and the consensus estimates, we think now is a good time to more carefully consider how it will capitalize on the next and likely much larger leg of growth in the industry and prepare for the inevitable bumps that may occur on the way.”
Why? Carriers are paying Apple way more money than they can afford to subsidize the iPhone for their users, and while that once seemed like a winning strategy, with carriers like Sprint now looking at a $20 billion bill over the next four years just to keep the iPhone on their network, it’s becoming clear that this sort of expenditure can’t last forever.
“Subsidies by post-paid wireless operators have fueled the growth of Apple’s $600 iPhone since its inception” wrote Piecyck. “Even in the pre-paid dominant markets of China and Europe, heavily subsidized iPhone’s are available to users willing to sign up for a contract. Wireless operators have been happy to subsidize smartphones to new and existing customers in order to provide a lift to the average monthly bill (ARPU) of their customer base, a metric which had been falling for the past three decades.”
“The positive inflection point in ARPU was cheered by investors but the cost to drive that ARPU accretion is now starting to eat away at profitability and the performance of those stocks. Operators, unwilling to stall the pace of ARPU growth, offered generous upgrade policies including some that enabled a fully subsidized phone upgrade only one year in to a two year contract. We expect those policies to change as the faster upgrade rate of smartphones compared to legacy feature phones has been a costly surprise to post-paid and pre-paid operators, alike.”
Ultimately, BTIG actually sees Apple making $1 billion in revenue in the third fiscal quarter than Wall Street consensus. Chump change to Apple, but enough, possibly, to finally stall Wall Street’s omnivorous hunger for AAPL stock.
Plausible enough to our eye, but Apple’s a company that constantly surprises us and manages the seemingly impossible.