Apple clobbered by rare Wall St downgrade, Japan looms

LOS ANGELES/SAN FRANCISCO Thu Mar 17, 2011 5:36am IST

A boy looks at an Apple iMac desktop computer at the new Apple Store in Pudong Lujiazui, in Shanghai July 10, 2010.  REUTERS/Aly Song/Files

A boy looks at an Apple iMac desktop computer at the new Apple Store in Pudong Lujiazui, in Shanghai July 10, 2010.

Credit: Reuters/Aly Song/Files

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LOS ANGELES/SAN FRANCISCO (Reuters) - A rare Wall Street downgrade stoked fears that Apple Inc's torrid growth is slowing and sent its shares sliding for the second straight day as nervous investors ponder the impact on the tech industry from Japan's largest-ever earthquake.

The world's largest technology company lost about $14 billion of value on Wednesday after JMP Securities' Alex Gauna downgraded the stock, pointing to a sharp pullback in sales growth at Apple's largest Asian contract manufacturer as a sign that business was also slowing at the iPhone and iPad maker.

"There's a risk of complacency. The sell-side has gotten itself into a game of one-upmanship," Gauna said. Investors "should make sure that they're comfortable with the situation ... especially since there's just so much uncertainty right now."

He added: "We know that Japan as a supplier matters."

Apple's stock slide -- the largest single-day loss in almost nine months -- comes amid uncertainty about the impact from the largest earthquake to hit Japan.

While it accounts for 6 percent of Apple's sales and is a major source of components for its screens, many analysts said Apple wielded sufficient clout and a good-enough track record to secure critical components -- for now.

Apple shares ended down 4.5 percent at $330.01 in heavy volume, following a 2.3 percent slide on Tuesday.

The company, which last week launched its iPad 2 tablet to crowds of fans outside its stores, has lost close to $22 billion in value over two days.

Gauna downgraded Apple to "market perform" from "market outperform," based on signs of a severe slowdown in sales growth at Hon Hai Precision Industry Co Ltd, a contract manufacturer and subsidiary of Foxconn that is heavily reliant on Apple's business.

Covering Apple for less than a year, he is among just five of 54 analysts on Thomson Reuters I/B/E/S with a "sell," "hold" or "neutral" rating on the stock, which is a perennial market darling and mainstay of global portfolios.

In an apparent response to Gauna's report, Oppenheimer analyst Yair Reiner said Apple's contribution to Hon Hai's revenue -- about a fifth -- was "limited," and made light of attempts to correlate their performance.

Ticonderoga analyst Brian White said the shift toward the iPad 2 -- which hit store shelves March 11 -- meant a gradual ramp-down of original iPad output, which could in turn have taken the air out of Hon Hai's sails.

BLOWING SALES

JMP said year-over-year sales growth in Hon Hai slowed from 84 percent in December to 37 percent in January and 26 percent in February.

Before this week's sell-off, Apple's stock price had doubled over 18 months. Apple declined to comment on the recent drop.

Wall Street is accustomed to Apple blowing its own sales estimates out of the water. But Gauna warned that major technology companies' shares have been punished more severely of late for missing financial estimates.

Nervous analysts have worried for years that the stellar stock prices of technology giants like Apple could tumble back to earth, especially as competition intensifies for its hottest products, from the iPhone to the iPad. The tablet is expected to have sold 1 million units since its Friday launch.

Some top hedge fund managers cut their stakes in both Apple and Google Inc in the fourth quarter, according to a Thomson Reuters survey of filings of the "Smart Money 30," some of the largest stock-picking hedge funds.

But BTIG analyst Walter Piecyk said demand for the iPad 2 has proven strong enough -- so far -- to sustain the sort of rip-roaring growth Apple is known for.

"The past weekend showed once again why Apple is putting up more than 50 percent growth. Lines for the iPad 2 extended longer than even for the iPhone 4," he said.

But with the sturdiness of the global tech supply chain uncertain, investors may be choosing to play it safe for now with Apple, analysts said.

Japan is a major source of glass for displays used in smartphones and tablets and is home to around a fifth of the world's semiconductor production. Japanese factories producing everything from chips to car parts have closed following the earthquake and tsunami last week, threatening supplies to manufacturers across the globe.

The uncertainty over Japan comes as rivals from Google, with its Android smartphone software, to Motorola (MMI) and its Xoom tablet, begin to vie for the attention of the same crowd that buys iPads and iPhones.

"This issue will be far-reaching across many of the leading tech (manufacturers), and Apple is also at risk," White wrote on Wednesday. But "Apple has enough pull in the supply chain due its size, supply agreements with up-front payments and success of its products to get more than its fair share of supplier output."

(Additional reporting by Jennifer Robin Raj in Bangalore; Editing by Gerald E. McCormick, John Wallace and Richard Chang)

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