Morgan Stanley: Most investors on sidelines ahead of Apple event

Plus: Analyst Katy Huberty’s most recent bull- and bear-base estimates for Apple in 2020.

From a note to clients that landed on my desktop Friday:

While sentiment has improved after the strong F3Q print and guide, we still feel the majority of investors are on the sidelines with low expectations into next week’s event and the upcoming iPhone cycle. We continue to favor AAPL into year-end in light of the fact that

1) iPhone expectations are low despite the replacement cycle already extending to 4 years, in-line with PCs,

2) Services Y/Y compares are improving with quarter to date App Store revenue up 22% Y/Y (vs. our +18% forecast and +17% Y/Y growth in C1H19; 1) and new services including Apple Card and TV+ will begin to impact the model over the next six months, helping further re-accelerate growth, and

3) Apple’s P/E multiple typically expands 12 months ahead of a major iPhone cycle which we expect with the launch of 5G iPhone(s) in September 2020.

According to Huberty, the key questions going into Apple’s Sept. 10 event are…

  1. Apple’s iPhone pricing strategy relative to past cycles ahead of an expected 5G upgrade cycle next year and given the international price rollbacks announced earlier this year and the expectation for new tariffs on smartphones exported from China to the US (to be implemented on December 15th).
  2. Timing of availability for the new iPhones given the scaled roll-out over the last two years which could influence Y/Y and Q/Q growth rates in the December 2019 quarter
  3. Details on Apple’s yet-to-be-launched Services Apple TV+ and Apple Arcade. Recent news articles… have disclosed expected pricing for each service ($9.99/month for Apple TV+ and $4.99/month for Apple Arcade) but the exact launch dates and details of free trials remain unknown, as do the content offerings at launch, which will be important data points to help model early adoption and revenue recognition.

Maintains Overweight rating and $247 price target.

My take: Readers have been asking for Huberty’s bull- and bear-case estimates. Most recently, from a July 31 note:

Bull: $339
Base: $247
Bear: $147

That’s quite a spread. The bear case assumes “full potential of tariff and regulatory risks,” including a crackdown on the App Store that cuts Apple’s take in half.

12 Comments

  1. Gregg Thurman said:

    One thing I don’t think WS is taking into consideration is the December quarter positive of the December 15 tariff hike.

    As we get closer to December 15 two things are going to happen:
    1. Apple is going to accelerate the importation of product from China as the tariffs will only apply to product that lands in the US after that date, and
    2. Anybody sitting on the fence about WHEN to buy will puLL decisions forward to avoid anticipated tariff induced price hikes.

    Of course this will be detrimental to March quarter results and the guidance Apple provides for that quarter.

    The reality of price increases is that Apple tries to finish a quarter with 5 to 7 weeks of inventory, so a tariff based price hike ostensibly should not be seen until about mid February. The average Apple consumer doesn’t know this as the media is focusing on the tariff start date, and not on how Apple (or any other importer) is planning to mediate the financial impact of the tariffs.

    REASON #4 FOR SITTING ON THE SIDELINES

    With low expectations then for March quarter performance, AAPL will decline during the period (unit sales having been brought forward into the December quarter). If it were me I’d be sitting on the sidelines as well in anticipation of such selloff.

    1
    September 7, 2019
    • Michael Thompson said:

      @Gregg I expect China to capitulate and accept OUR terms prior to 12/15. They can see that Biden, Warren or Bernie are never going to be the President. Anyone that thinks otherwise is completely deluding themselves. Biden won’t even be the Democrat nominee and he’s the only one with a remote chance. No one who’s realistic actually believes that ANY Trump voter from 2016 is going to flip to the Hard Left Socialists.

      The Chinese economy is already teetering and there’s NO limit to the tariffs that can be charged. Each week brings more quantitative evidence that China is in serious trouble.

      It’s up to China to determine whether or not they want to survive economically. It doesn’t really matter over the long-term whether or not there is a trade deal with China. We win either way. Either they self-destruct or they’re contractually compelled to buy more American made products and stopped from stealing our intellectual property.

      0
      September 7, 2019
      • Gregg Thurman said:

        Most excellent points Michael. My post assumed China does not cave.

        Is it possible WS doesn’t see it as you do?

        1
        September 7, 2019
        • Michael Thompson said:

          @Gregg I have several sources of real information about what’s going on in China. They cannot wait out even Trump’s first term, let alone 1/20/2025, when he’s actually going to leave office.

          Even the lying MSM reported that China relaxed the reserve requirements for their banks a couple of days ago. This isn’t the sign of a strong economy.

          0
          September 7, 2019
          • Gregg Thurman said:

            I only have one professional (brother-in-law a retired Air Force intelligence officer (Lt Col]) and a naturalized US citizen (Chinese) that helped immigrate to the US (got him a green card) with friends and relatives still in China.

            They both tell me the same thing about China’s economy (matches your observations). I have wrote about that here. Again, I don’t like Trump, but he is the right person, at the right time, to counter Chinese COMMUNIST expansion plans. It should be noted that less than 1% of Chinese are communists, in fact, now that China has embraced capitalism I don’t think they are communist any longer: they are fascist.

            0
            September 7, 2019
        • Michael Thompson said:

          @Gregg Remember that if Wall Street was all knowing, they wouldn’t have sold Apple down to 142 in January. Never do what they’re doing or what they’re saying to do. I do the opposite and I’ve make a fortune doing so. I will continue to do so.

          A few weeks they sold off the banks with the bogus recession story of the week. I picked up over 100,000 shares of a well known bank. Now that bank has recovered almost 10% in a few short weeks. This is only a trade, but I’m not selling yet. I’ll sell at my price. American banks unlike the undercapitalized and over leveraged Chinese banks, are strong and cheap.

          0
          September 7, 2019
        • Mark Visnic said:

          Wall Street abdolutely has not left room for acdeal in 2019. That might have weakened slightly last week but, expectations of no deal this year is leaning the boat heavily to one side. The view is good on the opposite side.

          0
          September 8, 2019
      • Mark Visnic said:

        Agreed Michael. About three weeks ago Snap on Tool’s CEO suggested that PRC economic weakness would lead to a deal after the 10/1/19 70th anniversary of the PRC. Three weeks later, the PRC states they will come to DC to resume trade talks — in early October. I like that the consensus has been expecting no deal until late 2020 earliest. It makes for a robust set up.

        0
        September 8, 2019
    • Mark Visnic said:

      5G upgrade cycle begins 6-7 months from Q2FY 20 guidance. Anticipation from 5G outweighs seasonally weak Q2, made moreso this year because of potential tariffs. I’m not a seller ahead of the Q and would be a buyer on any weakness. I don’t expect to be alone on that expectation. Any weakness will be shallow, if at all.

      0
      September 8, 2019
  2. Fred Stein said:

    Philip please give us emoji so we can heart Katy.

    1
    September 7, 2019

Leave a Reply