Updated from 9:22 a.m. EST to include more analysis from analyst about Apple TV on the second page.
Wells Fargo analyst Maynard Um downgraded shares to "market perform" from "outperform," citing pressures on gross margins, particularly driven by the new iPhone. He kept his price target range of $536 to $581, noting that while gross margins may see pressure, there are certain positive catalysts to come this year.
Apple shares were lower in early trading Thursday, down 1.3% to $553.80.
"Gross margins have decreased by an average of 225 basis points (bps) in the period following the launch of new form factor iPhones while increasing ~225bps in the two quarters following an "s" launch," Um wrote in a note. "With the secular story, in our opinion, largely over, we believe the stock may be more susceptible to trend with margins."
Apple launched the iPhone 5s and iPhone 5c in September, the first time the Cupertino, Calif.-based company has launched two versions of its popular smartphone.
Also pressuring Apple's rating is the fact that there may be a smaller amount of future opportunity for existing Apple products, including the iPhone, iPad and new Macs, as well as a shift of power from companies such as Apple, Samsung and other original equipment manufacturers (OEMs), back to wireless companies, such as Verizon (VZ) and AT&T (T).
"Wireless operators have been offering generous subsidies of ~$400 per smartphone, getting the price to consumers to ~$250 in an effort to drive increased smartphone penetration," Um wrote in his note. "With 75%+ penetration in some developed countries (US), we fear subsidization may become less of a focus as operators switch to a focus on driving usage. While we do not anticipate an immediate value swing, we believe we could see further evidence of a shifting balance of power that could weigh on Apple shares."
Last month, AT&T CEO Randall Stephenson made comments at a UBS investor conference that perhaps the era of massive subsidies for handsets may be coming to an end, as the smartphone market matures, particularly in the U.S. "When you're growing the business initially, you have to do aggressive device subsidies to get people on the network," Stephen said on Dec 10. "But as you approach 90% penetration, you move into maintenance mode. That means more device upgrades. And the model has to change. You can't afford to subsidize devices like that."
Apple CEO Timothy D. Cook has made comments about subsidies in the past, saying that he's not too worried about them disappearing, as wireless providers want to offer the best products to their customers.
"From the carrier's perspective, I think it's also important to remember that the total subsidy that they pay is fairly small relative to the monthly payments they collect over a 24-month contract period," Cook said on a July 2012 earnings call. "And I think many would tell you, they certainly told to me, that iPhone has several advantages for them over other smartphones, the churn rates are much less, you see carriers now focusing on shared data plans and I think an iPhone customer is likely more - is more likely to have a Tablet or an iPad. And so I think they really value these customers quite a bit."
While Um downgraded shares, he did note several highlights for 2014. Those highlights include the next iPhone, currently dubbed the iPhone 6, which many believe will have a 4.5 inch or 5-inch screen. Um also mentioned iBeacon, an indoor position system, used to notify iOS users of nearby deals. Apple describes it as "a new class of low-powered, low-cost transmitters that can notify nearby iOS 7 devices of their presence."
The last catalysts Um mentioned were the potential for an increased dividend/buyback, and the oft-rumored iWatch.
Um also mentioned the long-anticipated but never seen Apple TV. "While we expect Apple to enter the TV market eventually, we do not expect a product in 2014," the analyst mentioned in his note.
He also expects Apple to report strong results this holiday season, driven by the iPad mini, iPad Air and new iPhones announced in recent months. He's expecting Apple to have sold 54.8 million iPhones and 24 million iPads this holiday season.
--Written by Chris Ciaccia in New York
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