Apple Gets Major Downgrade

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Small but well-regarded research firm Pacific Crest cut its Apple Inc. (NASDAQ: AAPL) rating to Sector Weight from Overweight, which is the same as from a “buy” to a “hold.” The reason is that, while the iPhone 8 may be a success, its sales will taper off within a few quarters of its launch.

CNBC quoted the note from Pacific Crest analyst Andy Hargreaves:

We believe AAPL anticipates strong performance in the iPhone 8 cycle, while providing relatively little weight to risks through the cycle or the potential for iPhone sales to decline in FY19.

The analysis gets to the core of Apple’s largest challenge. The iPhone is the great majority of its revenue, and the company is handcuffed in an upgrade cycle in which a new model drives sudden and huge sales, and then slowly tapers until the next model is released. Over these cycle periods, holiday sales always provide a bump, but it is only temporary.

In its fiscal second quarter, which ended April 1, iPhone sales were $33.3 billion of Apple’s $53 billion total. iPad sales were $3.9 billion. Mac sales were $5.8 billion. The iPad and Mac are both mature products that are upgraded occasionally.

The iPhone 8 will be the fourth full generation of the smartphone, although there have been intermittent releases with small upgrades. The first iPhone was released 10 years ago. It has more stiff competition now. Samsung in particular jockeys with Apple for the lead in global smartphone sales. A number of other companies that use the Android OS from Alphabet Inc. (NASDAQ: GOOGL) continue to chase Apple with varying degrees of success.

Apple’s attempts to launch a product that might add substantially to product sales have been a failure. The most notable is the Apple Watch, the wearable leader in sales worldwide. However, for now, wearables are a niche product, so Apple’s lead does not mean much.

Very few people think Apple can create a product that can challenge the iPhone in total revenue, which means it will be trapped by the iPhone’s success, no matter how spectacular it is from time to time.