Morningstar: Apple’s moat is narrow, and staying that way (video)

When it comes to Apple’s “moat trend,” Morningstar is of two minds.

From analyst Abhinav Davuluri’s Why We’ve Downgraded Apple’s Moat Trend:

After taking a fresh look at our thesis on Apple, we are reducing the firm’s moat trend from positive to stable, while maintaining our $175 per share fair value estimate and narrow-moat rating. We still view switching costs around the iOS ecosystem as Apple’s primary moat source, and while we believe such costs remain strong today, we don’t necessarily believe these switching costs are strengthening, thus the shift to stable.

Maintains fair value of $175. 

My take: It’s easy to imagine a moat having width and depth. It’s harder to picture “moat trend” — not without some heavy earth-moving equipment. What’s weird is that only three trading days earlier Morningstar had rated Apple’s moat trend as positive. Cue the video:


As for Morningstar’s $175 “fair value,” I’ve come to see that number as today’s buy target for the buy side rather than next year’s price target for the sell side.

16 Comments

  1. James Dearborn said:

    Does Morningstar deserve credibility?

    0
    July 5, 2018
  2. John Blackburn said:

    These takes on Apple’s appeal to customers often settle on overly simplistic characterizations and comparisons, comparing Apple to Samsung as if the software doesn’t really matter, or likening Apple to Coke as mere peddlers of a commoditized product differentiated primarily by marketing.

    An analysis so downsampled commoditizes itself—and seldom makes for pleasant listening.

    0
    July 5, 2018
    • Peter Kropf said:

      “These takes on Apple’s appeal to customers often settle on overly simplistic characterizations and comparisons,…”

      I find the biggest never mentioned voids in analysts’ thinking are these two:

      Apple has nearly an 800 MILLION iPhone installed base that can be security updated, accelerated, improved, and secured, all at ‘once’. Android, not so much.

      Apple is the only FAANG firm that has designed for user privacy and security beginning with Jobs’ mid 90s return to Apple.

      I propose that two new categories be created.

      Secured Phones – Almost all iPhones plus a small number of Google made phones.

      Unsecurable Phones – Old unsupported iPhones and the 2 Billion+ Android phones.

      4
      July 5, 2018
      • John Blackburn said:

        Also never mentioned: Apple doesn’t sell devices, they sell…
        Devices+Software…
        + Elegantly and beautifully designed,,,
        + That works…
        + And is usable by everyone.

        Likening Apple to a device manufacturer is like likening Disney to a fireworks manufacturer.

        6
        July 5, 2018
        • Steven Noyes said:

          I have long said Apple is neither a software nor a hardware company but rather a systems company. Their revenue comes from selling pieces of those systems (the hardware) but their effort really goes into designing all the software and hardware of a tightly coupled system.

          0
          July 6, 2018
      • David Emery said:

        Search for spyware on android in your favorite search engine. There are lots of apps out there to -counter- that threat, but maybe the Android developer community sees that as a feature. I saw an article yesterday about how so many apps are ‘monitoring your phone’ – but when I read it it was all about Android. There was another article I saw yesterday about bloatware. Mostly it was about Android and MS Windows, but Apple got a small ding for the (previous) inability to remove the Watch app from your phone.

        Maybe Apple needs “I’m an iPhone/I’m an Android” ads. 🙂

        3
        July 5, 2018
      • Richard Wanderman said:

        “Apple has nearly an 800 MILLION iPhone installed base that can be security updated, accelerated, improved, and secured, all at ‘once’. Android, not so much.”

        This!

        0
        July 5, 2018
  3. Paul Brindze said:

    “As for Morningstar’s $175 “fair value,” I’ve come to see that number as today’s buy target for the buy side rather than next year’s price target for the sell side.”

    But it looks a lot like the only two buyers that count (Apple and Berkshire Hathaway) have a clear buy target of 185+. My guess is this tug of war has increased the short interest, and, since I would guess that their checkbooks are no match got that of those two buyers, we could see a serious short squeeze soon.

    0
    July 5, 2018
    • David Emery said:

      It’s really hard to see Apple -losing- $10 under any credible scenario in the next year.

      0
      July 5, 2018
  4. Fred Stein said:

    Davuluri’s metaphor stretching has reached the breaking point.

    0
    July 5, 2018
  5. Robert Paul Leitao said:

    I view dozens of Morningstar reports each month. In my view, the firm is comparatively cautious in its star ratings and Fair Value Estimates (similar to target prices). At present the firm has a 3-star hold rating on Apple and a $175 Fair Value Estimate.

    One reason Morningstar gives Apple a “narrow” economic moat rating is because of what’s perceived to be short product cycles with many competitors vying for product sales. That’s my read on the firm’s analysis.

    In my view, the firm’s analysis does not fully factor Apple’s strong position in the enterprise market which is based not only on hardware quality but also security. Also, consumers actively engaged in Apple’s eco-system often own more than one Apple-branded device. The switching costs or barriers to competition in my view evidence a widening economic moat.

    Again, in my view Morningstar tends to be more cautious or conservative in its ratings of equities than other firms. In my view, it’s best to read the analysis of more than one firm when researching an equity or industry. I don’t dismiss the value of any firm’s coverage simply because it doesn’t synch with my own view of Apple or other equities I follow.

    Morningstar is a reputable firm and its often cautious stance on a equity can be a a beneficial counterweight when researching an equity or industry.

    1
    July 5, 2018
    • George Ewonus said:

      Good point, Robert. I get an overall Morningstar analysis with my banking service. I must say the analysis of Apple completely misses the boat (metaphor intended). Probably not penned by Davuluri though. Morningstar headlines that “AAPL has outperformed its Communications Equipment peers over the last three months and over the past year.” Then it lists Apple’s Communications Equipment peers as (in order) Sony, HP, Nokia, Panasonic, Dell, Lenovo. Right!? No FANG for these characters. At least in Apple’s case, the only narrow moat is in the mind of Morningstar. They might be better in other areas.

      0
      July 5, 2018
  6. Gregg Thurman said:

    A Morningstar examination of respective product resale values would undermine their assumption that Apple’s “moat” is narrowing.

    1
    July 5, 2018
  7. Fred Stein said:

    Apple’s moat is wide. 650M iPhones run the latest public release of iOS (81% * 800M).

    More enterprises support Macs each day. In the past, Macs were either not supported or not allowed.

    Apple dominates the Smart Watch segment.

    0
    July 6, 2018

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