Katy Huberty lowers Apple target, cites peer pressure

Meanwhile, she’s convinced that the Street’s Services forecasts for this year and the next are too low.

From a note to Morgan Stanley’s clients that landed on my desktop Tuesday:

Services strength drives estimates higher but peer multiple compression drives PT lower to $155 (from $164). Following strong March quarter App Store results and an analysis of the key drivers of Apple’s Licensing & Other segment, we raise our already above-street FY21 and FY22 Services revenue estimates by 3% and 5% respectively, and are increasingly convinced that consensus Services forecasts over the next 2+ years are too low.

We now forecast Apple Services revenue growth accelerates by 6 points to +22% Y/Y in FY21, up from +19% Y/Y previously, nearly 4 points ahead of FY21 consensus Services growth of +18% Y/Y.

Keeping the rest of our Product-related estimates unchanged, our stronger Services forecast pushes our FY21 and FY22 total revenue estimates 1% higher, and our FY21 and FY22 EPS 1% and 3% higher, respectively.

However, multiple compression over the last 2 months, primarily at Apple’s higher growth Services peers, more than offsets our higher revenue and earnings estimates, driving our new sum-of-the-parts based price target to $156, or 33x FY22 EPS, down from $164 previously.

AAPL shares have underperformed the S&P by 20 points since reporting F1Q earnings (Apple shares are down 13%; the S&P 500 is up 7%) but we believe positive earnings revisions into what we expect to be a strong F2Q earnings report later this month will drive a return to outperformance, keeping us Overweight.

Maintains Overweight rating, lowers price target to $155 [note: $156 in the headline, $155 in the text] from $164.

My take: A mixed bag, but on balance a positive note.

Cue Exhibit 4:

12 Comments

  1. Fred Stein said:
    I still love Katy. Her PT is above consensus, likewise her Services forecasts.

    With AAPL trading about 20% below average PT, it’s a steal.

    9
    April 6, 2021
  2. John Konopka said:
    I appreciate the honest evaluation from Katy.

    5
    April 6, 2021
    • Robert Paul Leitao said:
      John: Agreed. Katy’s not responsible for broad market trends. Concerns over potentially rising interest rates and higher corporate income taxes are apt to compress earnings multiples. It’s not an “Apple only” issue. Over the long-term, the market is a fairly accurate leading economic indicator and tends to forecast the pace of anticipated profit growth and economic growth about 6 to 9 months out. Apple’s not the “problem” here. I’m really not concerned about the share price or the earnings multiple. I’m concerned about the pace of FCF growth and continued funding of the massive share repurchase program.

      1
      April 6, 2021
  3. Gregg Thurman said:
    The June quarter is traditionally a sell off quarter leading to a 2H low the week of July 4.

    This year’s prints have been anything but traditional, but because the July 4 week has been so consistent I expect it to remain so. AAPL, post July 4, rises an average of 24% by January earnings.

    With the December quarter 2020 bubble thoroughly popped I’m expecting strong AAPL performance from here through FY22.

    2
    April 6, 2021
    • David Drinkwater said:
      I’m sure that your historic view and data are correct, but I expect the April report to be atypically strong, given that iPhone 12 starts were “delayed”.

      I definitely hope my “charity” shares will be north of $130 when I gift them. I feel confident that they will be, but I don’t know how far north.

      0
      April 6, 2021
  4. Jerry Doyle said:
    Earnings going forward for Apple never have had more blue skies ahead. Earnings will be “robust!” Analysts now are recognizing that Services are growing to the point where analysts are raising their forecasts on stronger licensing revenue Services growth. This now is moving the Apple revenue needle higher! So, what is this compression to P/E multiples in the peers? Cutting the PT from 164 to 156 (or 155)! The Services forecast will drive a higher multiple. Apple will have an upside Q2. It doesn’t stop there with Q2: the liquidity flowing into the economy is creating an economic boom driving forth an economy hitting on 12 cylinders (not 8) pumping Apple revenues across the board to all time new record highs. Additionally, the world of work, LD education, medical inquiries, shopping, communicating and even digital traveling all have evolved. This leads to more Apple revenues in the future. So, the price compression seems “irrelevant,” at this point.

    2
    April 6, 2021
  5. Daniel Epstein said:
    I think any analyst who tries to refine their price targets due to market pressures is just trying to stay honest. As I understand it her new price target is the middle path. She has a bear case and a best case number as well. In total the range is a low of 85 and a high of 217 (if I am remembering correctly). Apple always seems to trade more comfortably 15 to 20 % lower than the middle price target until it gaps up (and sometimes down) It would be good to see how close to correct she has been over time. My impression she tells us good information but is not as spot on when it comes to price action

    0
    April 6, 2021

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