Why Morgan Stanley (not Katy Huberty) lowered Apple target $10 to $185

From the note by analyst Erik Woodring to sent to clients Wednesday that landed on my desktop Saturday:

High-end consumer spending intentions are starting to deteriorate... representing a growing risk to consumer hardware companies... As a result, we are cutting estimates and PTs across our consumer hardware coverage... and downgrading Sonos to EW (from OW), leaving Apple as our only consumer hardware Overweight.

Apple remains our only consumer hardware Overweight, but is not fully immune from a slowdown in consumer spending. With a loyal installed base of 1.1B+ users, greater exposure to the high-end vs. low-end consumer, ability to invest through cycles, and strong FCF/ROIC, we believe Apple is the best positioned company in our coverage to weather a consumer downturn. Apple historically shows greater insulation from economic cycles, outperforming our coverage by 18 points, on average, late in the economic cycle, and is entering 2 separate product launches which generally get priced in 6-9 months ahead of time (iPhone 14 launch in September & a rumored AR/VR headset release in 2023).

However, in our view, it would be shortsighted to believe Apple is completely immune to a weaker consumer, as Apple's Y/Y revenue growth has a high correlation to changes in US consumer net worth, particularly the top two quintiles. Furthermore, Apple revenue has had a 0.74 correlation to the S&P 500 over the past 5 years, which makes sense given equity prices partially influence high-end consumers propensity to spend. By product, iPhone revenue is the least correlated to equity prices (0.51 correlation) – showing relative defensibility, given how critical the iPhone are to consumers' lives – while Services is the most correlation (0.96 correlation).

Maintains Overweight, lowers target to $185 from $195.

My take: Interesting that Huberty's name is not on this one.

2 Comments

  1. Michael Goldfeder said:
    @PED: The obvious reason Katy’s name isn’t attached to this note is that it skews the factually accurate numbers of 1.85 billion Apple “devices” into an extremely deceptive figure: “With a loyal installed base of 1.1B+ users.” Typical crap that while “technically correct as it does say; “1.1B+ users” it’s set forth in the usual snide and deceptive manner to imply “just a wee bit” over 1.1B. Perhaps this note came from the same “Block Trading Unit” that is currently under investigation by both “Governmental Prosecutors” and Regulators?

    1
    June 18, 2022

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