Apple could fall 20% as Watch disappoints: Analyst

Published Thu, Jan 15 20158:48 AM ESTUpdated Thu, Jan 15 20159:53 AM EST

Apple shares could fall 20 percent as iPhone sales slow in the second half of this year and sales of the company's new Apple Watch fail to offset that decline, an analyst said in a note Thursday. Abhey Lamba of Mizuho Securities downgraded the world's biggest company, whose shares rose almost 40 percent in 2014 to a record high, to "neutral" from "buy." The analyst's 12-month price target remains unchanged at $115, about $5 above Wednesday's closing price, but Lamba said "downside" for the stock could be in the mid-$80s. "While F1Q15 results will likely be extremely solid and March guidance could indicate continued momentum, we believe iPhone sales will decelerate more than normal later in the year," states the note. "Additionally,our checks indicate that Apple Watch sales could be disappointing and other categories are unlikely to offset the slowdown in iPhone sales creating pressure on out-year estimates." Apple's stock outperformed the market in 2014 as consumers snatched up the iPhone 6 and the bigger iPhone 6 Plus. With gross margins between 49 and 58 percent, the phones are the most profitable product for the company, according to Mizuho. But Apple is a victim of its own success in a sense, according to Lamba, as it will be unable to add enough new iPhone 6 users this year to justify the company's size. Read More Apple to return $200 billion to holders: Analyst States the report: "The company attracted about 87 million new users in FY12, which was significantly greater than 53 million new users in FY11. However, new user additions slowed to about 82 million in FY13 and it went further down to 50 million in FY14 despite the addition of China Mobile to its distribution network. Based on our current estimates, Apple needs to signup about 45-50 million new users in FY15, which is possible given the launch of iPhone 6, but material upside is unlikely." And while the company has benefited from increased Mac sales and blockbuster sales of apps for the iPhone, sales of the phone itself still drive its net income statement more than anything, and in turn, the stock, the analyst said. Apple "now generates over half of its revenues and, according to our estimates, nearly two-thirds of its gross profits from iPhones," said Lamba. "The stock's performance is highly correlated to iPhone sales and a slowdown in shipments would make it hard for the stock to work." The analyst's call for poor sales of the new Apple Watch, which Mizuho sees introduced in March at $350 a unit, comes from checks on Apple's own supply chain, not a consumer survey. So Lamba believes Apple knows it may not be the hottest product and is therefore making fewer than Wall Street expects. Read More Xiaomi takes aim at Apple's phablet "Our initial supply side checks indicate the company is not expecting huge demand out of the gate," states the note. "Apple Watch build plans are significantly below current expectations of 15-25 million units." To be sure, Apple's below-market multiple of 17 has the bulls reasoning that the shares are undervalued and that a possible increased buyback and dividend make the stock even more attractive. The analyst speaks to that valuation as well. Read More Is the 'Watch' Apple's Zune moment? "Apple's earnings multiple is relatively in-line with the trend line for other large companies with limited room for upside from multiple expansion."

An iPhone 6 Plus at an Apple store

Adrees Latif | Reuters

Apple shares could fall 20 percent as iPhone sales slow in the second half of this year and sales of the company's new Apple Watch fail to offset that decline, an analyst said in a note Thursday.

Abhey Lamba of Mizuho Securities downgraded the world's biggest company, whose shares rose almost 40 percent in 2014 to a record high, to "neutral" from "buy." The analyst's 12-month price target remains unchanged at $115, about $5 above Wednesday's closing price, but Lamba said "downside" for the stock could be in the mid-$80s.