Citigroup Pares Apple on Growth Concerns

The shares fell Monday after analyst Rich Gardner cut his opinion to hold from buy, citing prospects for slowing revenues

Apple Computer (AAPL) stock moved down Monday after Citigroup downgraded it to hold from buy. The reasons: a small chance that the iPod maker will beat the consensus revenue forecasts for the last two quarters of 2006, the recent jump in the stock, and disappointment with the company's new product line-up for the key holiday selling season.

Citigroup analyst Rich Gardner says that on the product front, recent checks suggest that the company is unlikely to introduce a new video iPod with a larger screen and "virtual click wheel" before the peak holiday season. He notes new products announced on Sep. 12 appear to represent the company's entire holiday line-up (see, 9/13/06, "Apple's Latest Fruits").

Gardner says he sees little potential for revenue upside vs. the consensus in the third quarter or fourth quarter of calendar year 2006. He says gross margin upside should yield 4 cents to 6 cents of EPS upside in both quarters, but he believes this is largely reflected in the share price.

Gardner predicts revenue growth to slow, from 37% in fiscal 2006 to 20% in fiscal 2007 and 12% in fiscal 2008.

Gardner also noted a 52% rise in the stock since mid-July. Gardner says he might reconsider the new hold rating if the shares pull back below $71. Apple shares fell nearly 3% on Monday to $74.75.

While Gardner is not the only expert that has recently gone sour on Apple stock (see, 9/22/06, "Breaking Away from 'Over Loved' Stocks"), most Wall Street analysts are still bullish on it. When Apple unveiled its new products on Sept. 12, Standard & Poor's Equity Analyst Richard Stice reiterated his buy opinion on the stock.

"While largely anticipated, we think today's news represents another important step by Apple to become further entrenched in the home of the consumer," Stice wrote in a research note that day. "We continue to be encouraged by Apple's level of innovation, brand awareness, and by its cash position."

While there's no question that Apple's brand is strong, but some experts are starting to wonder if its new products will be enough to boost growth -- and the stock.

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