Mizuho Securities Co Ltd analyst Abhey Lamba recently shared in a note that Apple Inc. shares could drop 20% as sales of the iPhone slow in the second half of the year and sales of the Apple Watch fail to make up for the decline. The analyst downgraded the stock from buy to neutral, with a $115 target price. Shares of the company have been falling this year, down 12% from their 52-week high signaling that Apple is in a correction.
Apple shares surged by around 40% in 2014 to a record high. Lamba believes that the downside of the stock is disproportionate to the reward, even as his target price is higher than the current price of $105. If the risk plays out, the stock could fall to the mid-$80s.
Analysts are expecting a strong fourth-quarter earnings report, with strong gross and operating margins thanks to strong iPhone sales and a favorable product mix of iPhone 6 models. Besides the strong fourth-quarter results, the company is likely to increase dividend payments in April and will continue to buy back the stock.
Lamba claims that these positive factors are already factored into the stock price. The new iPhone models are the most profitable products for the company, but it will be hard for Apple to keep up sales throughout 2015 in order to justify its valuation. A slowdown of iPhone shipments due to a saturated smartphone market could harm the stock.
The analyst also believes that the Apple Watch will not be able to make up for declining iPhone sales. His expectations for below-par sales of the new wearable technology are based on the company’s own supply chain checks and not on a consumer survey. This indicates that Apple is expecting fewer units will be sold than Wall Streets current expectations..