We have downgraded Apple Inc. (AAPL) to Neutral from our previous Outperform rating. Our price target remains at $225, which represents a P/E multiple of 26.1x our fiscal 2010 earnings estimate, a premium to the S&P 500 and more accurately reflecting the current outlook.
 
Apple has experienced tremendous growth, driven by the success of its iPhone and increased Mac shipments. The company has undergone a total turnaround from a loss of $0.07 per share in 2001 to a profit of $6.29 per share in fiscal year 2009.
 
The company reported strong 2009 results with increased revenue and earnings growth despite the recession. The results beat the Zacks Consensus Estimate and the company’s own guidance. We expect the company to report stronger results in fiscal 2010.
 
Apple is expected to introduce a new tablet device later this month with a shipping date in March, which could drive the fortunes of the company.
 
However, the smartphone market is heating up and the company faces tough competition from Nokia (NOK), Palm Inc. (PALM) and Research in Motion (RIMM). While Apple has various positive attributes, we believe that the company’s strong growth is already priced into its shares, although momentum could drive the shares slightly higher. Thus we advise stockholders to hold the shares.
 
Recently, Nokia filed a complaint against Apple with the Federal District Court in Delaware, alleging that Apple’s legendary iPhone has violated as many as ten Nokia patents from 2007.
 
Additionally, while Apple is strongest at the high-end of the market, Nokia has a global reach and delivers a wider range of handsets, targeting both low and high-end consumers. We expect the mark et for high-end smartphones to slow more dramatically, while lower priced devices continue to grow. This is likely to hurt Apple, as it is strongest in the high-end of the market.
Read the full analyst report on “AAPL”
Read the full analyst report on “NOK”
Read the full analyst report on “PALM”
Read the full analyst report on “RIMM”
Zacks Investment Research