AAPL: Citi Cuts to Hold, Target to $575 on Rising iPhone, Tablet Competition

Citigroup’s Glen Yeung Sunday evening cut his rating on shares of Apple (AAPL) from Buy to Neutral, and cut his price target from $675 to $575, after discussions with component suppliers in Asia prompted him to cut his iPhone unit estimate by 20 million units for this fiscal year ending in September, which chops $20 billion off of his Apple revenue model for the year.

Yeung initiated coverage of Apple quite recently, on November 26th, urging investors to take advantage of the sell-off in the stock.

Yeung, Citing data gathered in a survey of smartphone and tablet computer purchase intentions, put together by his colleague, Citi’s software analyst Walter Pritchard, shows that Apple still has leadership in both smartphones and tablets, but that Samsung Electronics (005930KS) is “closing the gap” when it comes to purchase intentions, and that Apple runs the risk of seeing leadership eroded both because customers want larger screen sizes for phones and because it’s becoming harder overall for anyone to innovate in tablet computers.

“Near-term supply chain order cuts, while inconclusive in nature, bring into question the strength of iPhone5 and refocus investors onto risks in the Apple story,” writes Yeung.

The data from suppliers suggest to Yeung that there is newfound volatility among Apple’s component suppliers as lead times change for the iPhone with faster production introductions:

Supply of iPhone5 has improved. Our checks suggest Apple has seen a 45-50% increase in monthly iPhone5 production output October to December. While some of this increase was anticipated, our discussions with various points in the supply chain indicate yield improved faster-than-expected. Given that Apple would likely double order in periods of low-yield, order cuts as yields improve seem reasonable. As we noted in our initiation, we see execution risk for Apple as it decreases the time between new product introductions on larger volumes each time: we believe this kind of supply chain disruption is indicative of this.