With Almost $100 Billion in Cash Reserves, Apple Gets Downgraded

Despite having a cash reserve of almost $100 billion and soaring sales of its popular products like the iPhone, Apple saw its stock smacked with a rare downgrade yesterday. Why?

Apple is said to have an enviable problem: It has too much cash and does not know what to do with it. But last month, Apple announced it was planning a $10 billion stock buyback and a dividend payout for its investors, as the technology giant sought to return part of its $97.8 billion cash holdings to its shareholders.

Despite having a cash reserve of almost $100 billion and soaring sales of its popular products like the iPhone, Apple saw its stock smacked with a rare downgrade yesterday. Why?

Apple is said to have an enviable problem: It has too much cash and does not know what to do with it. But last month, Apple announced it was planning a $10 billion stock buyback and a dividend payout for its investors, as the technology giant sought to return part of its $97.8 billion cash holdings to its shareholders.

Earlier in March, Apple’s co-founder Steve Wozniak was quoted saying Apple stock, currently trading around $639, has the potential to hit $1,000 in the future.

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Yet, Apple received its first downgrade in nearly six months, after BTIG cut its rating on Apple from ‘Buy’ to ‘Neutral’ yesterday.

In a note to investors, veteran technology analyst with BTIG, Walter Piecyk, said he expects Apple to have another blowout performance for Q2, but worries about Apple’s profitability beyond that timeframe. Apple is expected to report its Q2 results on April 24^th.

In particular, Piecyk expressed doubt that wireless companies will continue offering iPhone subsidies at the expense of their profit margins.

Apple currently sells its iPhones to wireless carriers at $600 per set, who then re-sell the phones to consumers at a subsidized rate tied to a typical two-year contract.

In a research note, Piecyk said:

[quote] We expect post-paid wireless operators to remain firm in their plan to stunt the pace of phone upgrades in 2012 and we expect to see some initial evidence of their success in the current quarter. This will increase the need for Apple to grow its business in the pre-paid dominated emerging market space, in which handset subsidies are a rarity and the $600 average selling price of the iPhone represents a big chunk of a household’s monthly income. [/quote]

While wireless carriers, such as Apple’s biggest customer AT&T, were initially happy to provide the subsidies on expectations that data usage would raise billing income, it has not exactly played out that way.

Instead, Piecyk says Apple would have to shift its focus to expansion in emerging markets, where subsidies are not a given and where price is a huge deciding factor.

Piecyk added:

[quote] We believe that investors should take a breather during the expected strength of this quarter and the rapid rise in the stock. [/quote]

BTIG is not the only firm to hold a bearish outlook on Apple. Morningstar, ScotiaBank and Societe Generale have Apple on a ‘Hold’ rating, while Blue Water Capital Markets and MF Global Securities are among the rare breeds to rate Apple a ‘Sell’.

According to Piecyk, it is now a “good time” to “carefully consider how Apple will capitalize on the next and likely much larger leg of growth in the industry and prepare for the inevitable bumps that may occur on the way.”

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