As Apple (AAPL) inches closer to a $2 trillion market-cap valuation, a BofA analyst just downgraded the stock to Neutral, noting “risks should not be ignored.”
The downgrade comes almost a week after the iPhone giant announced a 4-1 stock split along with quarterly results which smashed Wall Street expectations. Shares have recently been trading at all-time highs.
“We are downgrading shares of AAPL to Neutral as we view risk reward more balanced at these levels,” wrote Wamsi Mohan in a note to investors.
The downgrade is accompanied by a price target increase from $420 to $470, “which assumes low-single digit year over year revenue growth and flat margins.”
Apple shares were trading relatively flat on Wednesday, hovering around $437 after several sessions of back-to-back gains. Year-to-date the stock is up 49%.
Mohan highlights the iPhone maker is trading at the highest premium to the S&P 500 (^GSPC) in 10 years.
“Shares have experienced a rapid multiple expansion (5 multiple turns),” while calendar 2021 estimates have largely been unchanged, wrote the analyst.
Mohan sees risks to product gross margin pressure from a higher bill of material costs for the 5G iPhones along with “tough compares in 2021 from an unsustainable trajectory (30% growth) of high margin App Store growth.”
Last week Apple and other big tech firms were scrutinized during a five-hour anti-trust hearing in which CEO Tim Cook was hit with questions about the dominance of the company’s App store.
Mohan highlights the potential risk of anti-trust regulation on the App Store and the possibility of “a higher tax rate in the event of a democratic win in the US elections” in November.
The analyst also cites “lower impact from share buybacks.”
Last week the tech giant announced a 4-1 stock split and reached all time highs as investors digested the earnings.
The analyst notes scenarios in which his team “could be wrong,” including a stronger-than -anticipated cycle from 5G iPhones, gross margin upside, and a weak dollar which could cause incremental upside.
The next big catalyst for the company is expected to come from the release of the iPhone 12 in the fall, which the company said during its earnings call could be delayed by a few weeks.
Ines covers the U.S. stock market. Follow her on Twitter at @ines_ferre