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Apple gets rare analyst downgrade

On Wednesday, Bank of America analysts led by Wamsi Mohan cut their rating on shares of Apple from buy to neutral, citing a number of risks. Key issues include tough comps, squeezed services margins by content amortization costs and risks in the 5G iPhones.

Video Transcript

- All right, welcome back to The Final Round. It's time now for our call of the day. And today, we're talking about Bank of America's latest on shares of Apple. The firm is downgrading the stock to neutral from a buy rating. But they still have a $470 price target on the stock that right now trades at $440.

Now, Apple shares will be split 4 for 1 coming up here, I think, just within the next six weeks or so. But kind of an interesting downgrade, and I think probably not unexpected, Shawna, given the run up we've seen in Apple. And I go back to the conversation we had with [INAUDIBLE], an analyst over at Deutsche Bank, probably about a month ago now.

And in his view, basically, 2/3 the move in Apple has been about the broader market. Bank America effectively says the same, saying that 4 to 5 turns of P/E that have been thrown onto Apple are just because of what's happening at the Fed. And I guess I'm almost surprised now, having read the note, that more analysts haven't issued a similar forecast on some of these stocks that are up now 50%, 60%, 70% in just the last few months.

- Yeah, Myles, I do agree with that. And that's an interesting point. Because I wouldn't be surprised if we do see more calls similar to this one. Because from the valuation's standpoint, it really does make sense. When you take a look at this call from Bank of America, they cut the rating on the stock. But they raise their price target from $420 to $470. So that really shows just how quickly the stock has come and how far it has come in such a short amount of time.

And when you go through some of the points that this analyst makes from Bank of America, I mean, it does make sense, just simply from a valuation standpoint. Apple, right now, trading its highest premium relative to the S&P in 10 years. So valuation plays some concerns there, very close to a $2 trillion market cap.

Maybe it is time for Apple to take a bit of a breather. And when you go through some of the risks that are facing the company right now, it's a little bit tough to argue with that. When you talk about the fact that, yes, they had this new cycle coming of iPhones, a 5G phone, debate out there about whether or not it's going to be this supercycle. But what I think is interesting in this note is that Bank of America talks about the fact that, hey, maybe this could point, potentially, for Apple to raise their costs on the upcoming 5G phones because of the cost that it makes for them to manufacture the phones. So that's interesting.

So maybe it's not as bullish of a move here, a bullish-- [INAUDIBLE] says maybe we thought it initially was for the stock. So a reason here at least to be a little bit cautious ahead of that release. And then some of the other reasons to be cautious, I mean, going back to what we saw last week with all four of the big tech giants on Capitol Hill or testifying virtually. Tim Cook was one of them. Raised time and time again questions about the antitrust concerns in relation to the App Store. Bank of America saying that that's a risk for the company going forward.

Also lower impact from share buybacks, that 4 for 1 stock split going forward. That will be interesting just to see how that plays out and the impact that's going to have on shares moving forward. And then also, the just ongoing concerns here as related to the COVID outbreak, the pressure there, the risk over in China. So I think all these factors folded into one, it's hard to argue with the fact that, hey, maybe it is time for Apple to take a breather right now. And I think this analyst from Bank of America makes very logical points to that fact.

- Yeah, Shawna, I think the antitrust portion was probably the most interesting, perhaps because it is actually reacting to something that could potentially happen, that is not already unknown factor. Specifically with the App Store, I think, unlike the other companies where, say, for example, Facebook potentially unwinding the WhatsApp or Instagram acquisition, this feels like a very tangible goal, right, lawmakers can focus on, with actually being able to give developers more money and a bigger cut out of being on the platform itself.

And then one other thing that the analyst does point out is that his team could be wrong when it comes to a stronger-than-anticipated cycle from 5G phones, gross-margin upside, a weak dollar, which could actually contribute to incremental upside for the company. So I think there is a bit of hedging there, per usual, from the analyst community.

- Yeah, I think anytime you're raising or upgrading or downgrading in a stock on valuation, you basically have to say, here are the fundamental things that are probably going to go right or wrong, but, you know just in case, we're going to put those aside for right now. All right, coming up on the other side of this break, we're going to talk about everything going on in the fixed-income market. We're going to be joined by Greg Staples of DWS Americas. We're back with our conversation in just two minutes.