Investing

Apple gets downgraded on concern services focus won't deliver big profits

Key Points
  • Maxim Group lowers its rating to hold from buy for Apple shares, predicting the company's subscription businesses will disappoint investors.
  • The firm predicts Apple's services segment will generate a profit margin comparable to its other businesses.
Tim Cook, CEO of Apple Inc.
Adam Jeffery | CNBC

The optimism over Apple's services opportunity is overblown, according to one Wall Street firm.

Maxim Group lowered its rating to hold from buy for Apple shares, predicting the company's subscription businesses will disappoint investors.

"Prior survey data indicates attach rates for [Apple's] subscription services will be at best 30%, likely lower given ecosystem centric approach, especially for services where entrenched incumbents exist," analyst Nehal Chokshi said in a note to clients Wednesday entitled "Downgrading to Hold as Subscription Services Long-Term Opportunity Not Attractive Enough & Expect FY19 to be a Down Year."

"We believe at best AAPL's subscription businesses at maturity will generate an operating margin in-line with the current corporate average of ~25% with some risk that actual long-term OM [operating margin] will be lower," he added.

VIDEO3:2203:22
Amazon and Apple engage in turf war for location of second headquarters

The analyst reduced his price target for Apple shares to $200 from $204, representing 6 percent upside to Tuesday's close.

Chokshi cited long-term operating margin Wall Street estimates for major subscription companies such as Spotify, Dropbox and Netflix, which range from 4 percent to 20 percent.

The company did not immediately respond to a request for comment.