Apple Starts The Year With A Downgrade From Wells Fargo

Apple has been downgraded to "market perform" from "outperform" by Wells Fargo analyst Maynard Um.

Um's downgrade is based on gross margin concerns.

"Our bullish thesis on Apple had been predicated on the expectation for gross margin (GM) expansion driven by the 5s cycle," said Um in his note, according to Street Insider. "While we still have conviction in the gross margin thesis (and the potential for iPad/iPhone unit upside), we believe this may be largely embedded into the valuation."

Um is also concerned that the balance of power is going to shift away from phone makers to carriers this year.

"Wireless operators have been offering generous subsidies of ~$400 per smartphone, getting the price to consumers to ~$250 in an effort to drive increased smartphone penetration," says Um, and it sounds like he's skeptical this can continue.

A few thoughts on that:

1. We believe Apple sets up long-term contracts with carriers, so we don't think this is an actual risk for Apple.

2. This meme was talked about last year, and Tim Cook generally shot it down by pointing out that carriers get loyal, high-priced customers from the iPhone.

3. This isn't a subsidy from the carriers, it's a charge that goes over 2 years. Jean Louis Gassee had a great post on this recently: "There is no subsidy. Carriers extend a loan that users pay back as part of the monthly service payment. Like any loan shark, the carrier likes its subscriber to stay indefinitely in debt, to always come back for more, for a new phone and its ever-revolving payments stream."

Anyway, Um has some positive thoughts about Apple.

He could see the stock benefiting from an iWatch, iBeacons, an iPhone 6, and a new bigger dividend/buyback plan.

The stock was down .75% in pre-market trading this morning.