UBS Has Concerns With Apple And Japan's Changing Dynamics

Most Apple Inc. AAPL traders have focused their international attention primarily on China in recent years, but Japan may end up being a major thorn in Apple’s side. UBS analyst Steven Milunovich sees two reasons why Apple investors should be concerned about Japan.

First, Japanese carriers are no longer aggressively discounting iPhones to lure subscribers away from the competition. Second, a wave of cheaper competition has flooded the Japanese market.

“Our industry contacts indicate that while the Apple brand remains string, cheaper alternatives are making inroads with Apple’s share potentially declining over time from 50 percent to 30 percent,” Milunovich explained.

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Why Japan Matters

While not the size of China, Japan represented 8 percent of Apple’s revenue and 11 percent of its profit in the most recent quarter. In addition Apple’s Japan operating margin of 45 percent makes it one of Apple’s highest-margin markets in the world.

Despite the warning signs of tough times ahead in Japan, UBS remains bullish on Apple’s stock. The firm only sees significant downside to the share price if iPhone sales numbers consistently decline by more than 10 percent per year. For now, Milunovich anticipates that Apple’s stock will remain range-bound.

UBS maintains a Buy rating and a $115 price target for Apple.

Disclosure: The author holds no position in the stocks mentioned.