Wells Fargo Downgrades Apple, Sees Limited Upside In The $105-$120 Range

Wells Fargo’s Maynard Um believes that given that Apple Inc. AAPL shares are up 12 percent since the company’s earnings release on August 26 and due to the limited visibility, the risk/reward on the stock is balanced at the current levels.

Um downgraded the rating on the company from Outperform to Market Perform, while lowering the valuation range estimate from $115-$125 to $105-$120.

Limited Upside

The analyst expects the stock to remain range bound, given that “expectations for 1) Street raising Dec qtr ests, 2) an up y/y Mar qtr, and 3) stable gross margins in this cycle are now largely anticipated by investors.”

Um expects limited upside potential from the high end of the valuation range estimate, given the limited visibility into the March and June quarters, and potential for pull-in of demand from future quarters, driven by the company’s aggressive country launch plans, with the iPhone 7 being launched in 28 countries, as compared to the 12 for the iPhone 6S.

Some Pros & Cons

The analyst expects Apple to report a year on year increase in units, although supply constraints might limit the units to 14-15 million.

“We think water resistance and improved camera are visibly the most attractive, though expected, features. However, we see risk that prior high end 128GB buyers may not necessarily opt to purchase the 256GB high-end this year,” Um cautioned.

The analyst also pointed out that the 3.5 mm dongle would allow users to stay with their existing headsets but it would limit the ability to charge and use the headset at the same time, which could be inconvenient.

In addition, Um views the Watch Series 2 as an improvement over its predecessor, and expects it to drive revenue of $3.8 billion.

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