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Apple: Where From Here?

NEW YORK ( TheStreet) -- There are a lot of questions about where Apple (AAPL - Get Report) goes from here. Some of the most well-known investors in the world are questioning the company's lack of innovation. But that doesn't mean the world is coming to an end for the technology giant.

Citigroup's Glen Yeung, who rates shares "neutral" with a $430 price target, noted that Apple's stock represents value at these levels, but there are some warts on the stock.

"At 10.1x 2014E EPS (compared to S&P500 13.5x), Apple represents value at face value, particularly in light of its 2.7% dividend yield vs. 2.11% for the S&P500," Yeung note. However, with consensus gross margins, and hence estimates, at risk and end-market growth facing steep deceleration, we expect AAPL to remain range-bound and do not recommend the shares at this time."

Analysts polled by Thomson Reuters are looking for earnings of $7.31 a share on $35.21 billion in revenue for the third quarter, and earnings of $39.57 a shareon $171.44 billion in revenue for the full year.

Apple shares were higher in premarket trading on Tuesday, up 1.26% to $450.76.

Yeung's concerns lay in the fact that people are moving toward older Apple products, particularly the iPhone 4 and iPhone 4S. Apple acknowledged this on its first-quarter earnings call, when the company said it ran into supply shortages of the older iPhone models, indicating that consumers want to own Apple products but aren't willing to pay up for them if there isn't the perceived value or innovation in new products.

As such, Apple's famously high gross margins are expected to continue down, with pricing pressure on both the smartphone and tablet side.

"While we have endeavored to capture this in our current estimates, we sense that AAPL consensus GM may be at risk for C2H13 (36.8%/37.7% versus Citi 35.9%/36.3%)," Yeung penned in a research note. He expects a low-cost iPhone in September, something many analysts are expecting. He's also expecting a sub-$250 iPad mini later this year. Both items could hurt Apple's gross margins even more.

There might be some short-term pain for long-term gain for Apple and its investors, something the company has said in recent commentary. "We are managing the business for the long-term and are willing to trade off short-term profit where we see long-term potential," Chief Financial Officer Peter Opennehimer said on Apple's most recent earnings call, citing the iPod as a great example of that fact.
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