Apple Gets Rare Downgrade on Doubts It Can Keep Selling iPhone for $600

Apple received its first downgrade in nearly six months from Wall Street after an analyst doubted wireless carriers will keep offering giant iPhone subsidies, hurting profit margins for the tech juggernaut and world’s largest company.

Apple iPhone 4
Emmanuel Dunand | AFP | Getty Images
Apple iPhone 4

“We expect post-paid wireless operators to remain firm in their plan to stunt the pace of phone upgrades in 2012 and we expect to see some initial evidence of their success in the current quarter,” wrote BTIG’s Walter Piecyk, a veteran technology analyst, in a note to clients Monday. “This will increase the need for Apple to grow its business in the pre-paid dominated emerging market space, in which handset subsidies are a rarity and the $600 ASP (average selling price) of the iPhone represents a big chunk of a household’s monthly income.”

Wireless operators were happy at first to offer these generous subsidies for the iPhone on expectations that their usage would raise customer’s wireless bills, making up the difference and then some. But it hasn’t exactly played out that way, especially for a carrier like AT&T , Apple’s largest customer.

While Appleshares are up 55 percent this yearand 87 percent over the last 12 months, AT&T’s stock is up just 2 percent in 2012 and flat over the last one year. Piecyk went to a “neutral” rating from a “buy.”

AT&T, Verizon , Sprint , Deutsche Telekom, Vodafone , America Movil and Telefonica will be among the carriers to dangle fewer iPhone upgrade offerings to customers at a subsidized cheaper price, said Piecyk. And as Apple expands further into emerging markets, where prepaid plans are the norm, carriers will be less likely to offer these subsidies to the company.

In what may be the boldest proclamation in the report, the decline in Apple sales that comes as a result of this carrier trend could lead to a revenue miss of up to $1 billion below the current consensus analyst estimate for the fiscal third (next) quarter, according to the analyst.

The last analyst to downgrade Apple was BGC Partner’s Colin Gillis in October of last year. The stock is up more than 60 percent since that downgrade as iPhone sales came in better than expected, a new iPad was introduced and the company declared a dividend. Forty-five analysts have “buy” ratings on Apple’s stock, just five have a “neutral” rating and only one has a “sell.” It is the most widely-held stock among U.S.-based hedge funds.

“With over 50 analysts covering Apple, our approach has been to conduct a demand based analysis based on an examination of trends at wireless operators,” writes the analyst in addressing the bullish army of analysts. “Our analysis falls short in its lack of supply chain data points often provided by component suppliers and manufacturers. However, we believe a demand based analysis was helpful in identifying the strong iPhone sales last quarter when our estimate of 35 million iPhones sold was the high estimate among our peers.”

Look no further than 90 minutes into Monday’s trading for evidence of the continued bullishness surrounding Apple shares, though, as it turned positive before 11am ET. Shares were down as much as 1 percent on the downgrade in early trading.

Piecyk believes a catalyst for a pullback is the lack of a new revolutionary product this year. Unlike many of his peers, the analyst does not expect an Apple iTV flat panel to be launched in 2012.

Piecyk writes, “We believe that investors should take a breather during the expected strength of this quarter and the rapid rise in the stock.”

For the best market insight, catch 'Fast Money' each night at 5pm ET, and the ‘Halftime Report’ each afternoon at 12:00 ET on CNBC. Follow @CNBCMelloy on Twitter.

* You can find Fast Money's entire conversation with BTIG’s Walter Piecyk about 5 minutes into the video above.

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