Morgan Stanley trims its Apple price target by $9

Analyst Katy Huberty’s says “peer multiple contraction” made her do it.

From a note to clients that landed on my desktop Thursday.

Executive summary:

On Apple’s April 30th earnings call, CEO Tim Cook noted that the November-December period was likely to be the trough in iPhone demand in China, following an improvement in performance during the March quarter helped by iPhone price cuts, VAT tax rollbacks, increased financing options and better consumer confidence. Data from push-messaging service provider Jigaung shows that the improvement in iPhone demand likely persisted through April, where Apple gained over 175bps of Chinese smartphone installed base share Y/Y. However, the increasingly tough trade rhetoric and actions recently taken by US and Chinese authorities make it less likely that this trend will continue into May/June. Given the risk of further restrictive trade measures, Katy answers investors’ top questions and highlights her expectation for shares to remain choppy, with a near term floor around $160. Katy’s estimates are unchanged but peer multiple contraction drives her [sum of the parts]-driven PT to $231 (from $240).

From the Q&A:

Is there a possibility that the Chinese government would retaliate by including the iPhone in tariffs the Chinese government places on US imports? On May 13th, it was reported that China would be raising tariffs on $60B worth of US imports, including “other telephones using cellular network or wifi”. We don’t see this as a meaningful risk because tariffs are levied at the port where products enter the country, and iPhones are currently produced within Chinese borders. More likely in our view is that the government could place an informal ban on purchasing certain products as it has done in the past for parts of the market (such as for government officials several years ago), which could have a negative impact on iPhone demand. Even in the absence of a formal, government issued ban, consumers may continue to protest the trade conflict by purchasing domestic branded smartphones at the expense of iPhone.

What does this all mean? How do you think about bear case EPS and the near term floor for the stock? After peaking at $210 in early May, Apple shares have retreated back to the $180 range following the escalation of US/China trade rhetoric. The situation remains extremely fluid and we admit that quantifying the overall impact of geopolitical tensions on Apple is difficult given the unknowns around timing, demand impact, retaliatory measures, exclusions, etc. Near term, the greatest risk to Apple is that Chinese consumers meaningfully slow their purchases of Apple products, which would likely cause another round of estimate cuts.

Maintains Overweight rating, cuts price target to $231 from $240. 

My take: Peer pressure.

4 Comments

  1. Chris Ferebee said:
    $9? Confusing precision with accuracy.

    0
    May 30, 2019
  2. Jerry W Doyle said:
    Are good Chinese citizens boycotting iPhones, or is the Chinese economy slowing to a crawl where job opportunities and pay are drying up resulting in decreased sales of all smartphones? I believe the latter is occurring. So, this is no Apple problem of Chinese citizens boycotting the company.

    Reports long have been coming that rural populations moving to urban areas no longer found job opportunities and the ability to have more prosperous lives. The Chinese economy last year grew at its slowest rate since 1990.

    A review of China’s economic data long has shown us that the country’s economic slowdown was fast underway. The economy has been on a decline tracking downward since the growth rate breached the 14 percent mark in 2007, even before the global financial crisis struck. The World Bank forecasts China will record a growth rate of 6.2 percent in 2019. Additionally, one may question with high merit the economic numbers reported by the PRC, making the stated slowdown most likely worse than we are told.

    Chinese citizens started having problems moving up the social ladder long before the start of the trade skirmishes between the USA and China. Chinese cost of living long has been outpacing income growth. Job opportunities already were drying-up. We know that when Chinese citizens left urban areas this past Chinese New Year’s Holiday that many had no jobs to return to in the cities. Additionally, no doubt exists that the current trade skirmishes (or potential trade war) is exacerbating an already declining Chinese economy.

    So, it is myopic to pinpoint existing trade tensions and economic problems in China as something that Apple or American firms could have circumvented.

    Trade tensions with China has existed almost back to the point when Bill Clinton facilitated the country’s entry into the WTO. (Big Mistake!) Those trade tensions over the past decades continued to grow. In retrospect, many economists, government officials and CEOs knew this day of having to confront China was coming as CEOs long have been the chief complainers to US government leaders to do something about China’s unleveled trade playing field.

    We fast are learning in a global economy that CEOs should diversify their supply chains no less than investors are told to diversify their investment portfolios. Too many American companies allowed themselves the elixir of targeting China the same as a small investor pours money into that one skyrocketing stock that keeps growing and going like the Duracell battery.

    American companies placed too much confidence that China’s economy would continue to hit on all cylinders and that American government leaders would be able to convince a state-run capitalistic and socialist market economy through entry into the WTO to become a laissez-faire capitalistic economy or even a mixed economic system of free markets with centrally planned economic controls. The small group of people in the CCP runs the country of 1.4 billion good Chinese citizens; and, the CCP isn’t about to give-up easily its power over the Chinese people.

    I’m optimistic that we will see some degree of consensus reached between the two countries on leveling the trade playing field so that we can return to some degree of normalcy in our mutual relationships. Both countries need each other. American companies, though, need to recognize that an ongoing conflict with China is going to continue, not just on trade issues, but on other major issues such as economic, human rights, Taiwan, the South China Sea, Cybersecurity, and others of which I could enumerate.

    1
    May 30, 2019

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