Morgan Stanley trims AAPL target to $298 as hopes for sharp consumer recovery dampen
Morgan Stanley said Friday it is reducing expectations for Apple through fiscal 2021 to better align with the bank's macro view that GDP growth will take a greater hit than previously expected, due largely to a prolonged consumer recovery.
Apple's 2020 MacBook Air will be crucial to Apple's financial recovery, says Morgan Stanley
In a note to investors seen by AppleInsider, Morgan Stanley analyst Katy Huberty said she believes that Apple will "continue to outperform peers" in a challenging market and is "best positioned" to recover business performance to previously existing levels.
But the company faces a variety of short term challenges due to weaker consumer demand across the board, and was recently forced to extend its Apple retail store closures till at least May.
While Huberty believes that global retail foot traffic could resume in May, she expects it to remain at 50% of historical levels through the end of August. This would theoretically improve to 70% in the September quarter, and up to 85% through the end of the holiday 2020 season. Some of the lost sales are expected to shift online, but analyst assumes that Apple will inevitably only capture about 30% of them.
Citing a recent analysis by Morgan Stanley's economic team, Huberty said her latest estimates better align with emerging expectations that GDP growth in both the US and China will be lower than previously forecast, given a slower-than-predicted coronavirus curve-flattening across the world. The impact on Apple's bottom line will be compounded by three factors related to the GDP contraction.
First, North American retail traffic is expected to remain "lower for longer," which Huberty and her firm expect to drop by over 95% year-over-year through the end of May. Additionally, customers surveyed suggest that just 22% of consumers indicate that they are likely to upgrade their smartphone in the next six months, versus 53% that expected to do so in the year-ago quarter.
Smartphone purchase intent surveys, performed between 2018 and 2020 - source Morgan Stanley
And third -- perhaps the most problematic for Apple -- is Morgan Stanley's view that the world could see a further extension of smartphone upgrade cycles; partly as a result of the coronavirus pandemic, and partially from other factors. In this scenario, the iPhone replacement cycle could periodicity become about the same as the current PC market, she said, which is roughly one upgrade every 4.3 years.
As such, Huberty is now forecasting 181 million iPhone shipments in Apple's fiscal year 2020, which ends in September. The replacement cycle is predicted to shorten a bit to 3.9 years for fiscal year 2021 with the advent of the 5G "iPhone 12," which the analyst sees fueling 207 million iPhone shipments. Those figures are a revision down from Huberty's previous estimates of 192 million and 224 million, respectively.
In the meantime, Morgan Stanley expects Apple to continue to pay employees during the store shutdown while remaining heavily invested in research and development.
While she predicts that the "iPhone 12" will ship in 2020, she also believes that it could arrive a bit later than September, with a ship date closer to that of the iPhone X in November, versus the September shipment of the iPhone 11 Pro.
Apple product category revenue growth in 2020 and 2021 - credit Morgan Stanley
Cited factors that will contribute to Apple's recovery are Apple's leading customer retention rates, and a balance sheet that will allow Apple to invest disproportionately to its competitors even in a long market downturn. Huberty says she believes that Apple will continue its stock repurchase effort, and will buy back $20 billion of shares quarterly.
Weighing the current positives and negatives, Huberty trimmed her target price on shares of Apple to $298 from $328. Her new estimate is based on a 3.2 estimated value/sales multiple on mature hardware like the iPhone, iPad, and Mac; a 4.2 EV/sales multiple on wearables, home, and accessories (including the Apple Watch and AirPods), and a 6.9x EV/sales multiple on Apple's services. Overall, this resolves into a 4.1x target EV/sales multiple, and a 19.9 target profit to earnings multiple.
Shares of Apple were trading down 1.1% (or $2.30) to $242.63 per share Friday morning on above-average trading volumes. As a whole, the NASDAQ was also lagging, down roughly 1.1%.
Apple's 2020 MacBook Air will be crucial to Apple's financial recovery, says Morgan Stanley
In a note to investors seen by AppleInsider, Morgan Stanley analyst Katy Huberty said she believes that Apple will "continue to outperform peers" in a challenging market and is "best positioned" to recover business performance to previously existing levels.
But the company faces a variety of short term challenges due to weaker consumer demand across the board, and was recently forced to extend its Apple retail store closures till at least May.
While Huberty believes that global retail foot traffic could resume in May, she expects it to remain at 50% of historical levels through the end of August. This would theoretically improve to 70% in the September quarter, and up to 85% through the end of the holiday 2020 season. Some of the lost sales are expected to shift online, but analyst assumes that Apple will inevitably only capture about 30% of them.
Citing a recent analysis by Morgan Stanley's economic team, Huberty said her latest estimates better align with emerging expectations that GDP growth in both the US and China will be lower than previously forecast, given a slower-than-predicted coronavirus curve-flattening across the world. The impact on Apple's bottom line will be compounded by three factors related to the GDP contraction.
First, North American retail traffic is expected to remain "lower for longer," which Huberty and her firm expect to drop by over 95% year-over-year through the end of May. Additionally, customers surveyed suggest that just 22% of consumers indicate that they are likely to upgrade their smartphone in the next six months, versus 53% that expected to do so in the year-ago quarter.
Smartphone purchase intent surveys, performed between 2018 and 2020 - source Morgan Stanley
And third -- perhaps the most problematic for Apple -- is Morgan Stanley's view that the world could see a further extension of smartphone upgrade cycles; partly as a result of the coronavirus pandemic, and partially from other factors. In this scenario, the iPhone replacement cycle could periodicity become about the same as the current PC market, she said, which is roughly one upgrade every 4.3 years.
As such, Huberty is now forecasting 181 million iPhone shipments in Apple's fiscal year 2020, which ends in September. The replacement cycle is predicted to shorten a bit to 3.9 years for fiscal year 2021 with the advent of the 5G "iPhone 12," which the analyst sees fueling 207 million iPhone shipments. Those figures are a revision down from Huberty's previous estimates of 192 million and 224 million, respectively.
In the meantime, Morgan Stanley expects Apple to continue to pay employees during the store shutdown while remaining heavily invested in research and development.
5G "iPhone 12" may ship later than expected, but still in 2020
Huberty also noted that there has been substantial supply chain chatter recently, specifically in regards to production of the "iPhone 12." She doesn't see the reports as inaccurate, but as more of a "catchup with expectations" and Apple adjusting production quantities in response to the economic condition.While she predicts that the "iPhone 12" will ship in 2020, she also believes that it could arrive a bit later than September, with a ship date closer to that of the iPhone X in November, versus the September shipment of the iPhone 11 Pro.
Apple services, its balance sheet, and the App Store are positives
Huberty also said she expects a 20.6% revenue increase from the App Store through the end of February, ahead of previous predictions, thanks largely to global "stay at home" orders. Through March 29, revenue growth is estimated to be above 15% year-over-year, also an improvement. Other net positives for Apple include a "global uptick" for Apple TV+ in recent weeks, demand for laptops because of work from home installs, and 5G smartphone demand in China.Apple product category revenue growth in 2020 and 2021 - credit Morgan Stanley
Cited factors that will contribute to Apple's recovery are Apple's leading customer retention rates, and a balance sheet that will allow Apple to invest disproportionately to its competitors even in a long market downturn. Huberty says she believes that Apple will continue its stock repurchase effort, and will buy back $20 billion of shares quarterly.
Weighing the current positives and negatives, Huberty trimmed her target price on shares of Apple to $298 from $328. Her new estimate is based on a 3.2 estimated value/sales multiple on mature hardware like the iPhone, iPad, and Mac; a 4.2 EV/sales multiple on wearables, home, and accessories (including the Apple Watch and AirPods), and a 6.9x EV/sales multiple on Apple's services. Overall, this resolves into a 4.1x target EV/sales multiple, and a 19.9 target profit to earnings multiple.
Shares of Apple were trading down 1.1% (or $2.30) to $242.63 per share Friday morning on above-average trading volumes. As a whole, the NASDAQ was also lagging, down roughly 1.1%.
Comments
Just read a report about a Kentucky county ordering Coronavirus patients to wear GPS ankle bracelets so they can be tracked.
If anybody is confirmed to have the virus and they are breaking a quarantine, then I am actually ok with them being shot to be honest.
They are carrying a deadly virus and if they do not adhere to the common sense rules of isolating and staying at home for example, then they should be taken out if they are foolish enough to violate common sense measures in order to protect the public.
We need to end this virus crap, so that things can get back to normal. This virus crap is killing the entire economy.
Religion does not give anybody an excuse to practice deadly stupidity.
I have read about multiple places where there have been large religious gatherings of people coming together to pray in close proximity to each other. That is plain stupidity and is also dangerous, not just to themselves, but to others. If they want to go to a deserted island and infect themselves, then they are free to do so, but they are not free to do so in a civilized society when there is a current pandemic taking place.
I am all about facts and science, and no religion trumps science.
We know that this is a virus and we know that it is very contagious, so large gatherings of people is an incredibly stupid idea right now and anybody attempting to practice such stupidity at this time should face the full consequences of their potential deadly actions.
As I stated above, we need to end this virus crap as quickly as possible, so that we can get back to normal. Having ignorant nutjobs running around doing what they please is not helping to end the virus situation.
No i dont have to be PARANOID.. but u sir are over the the top Paranoid !
Wow... how many people should get shot because of the flue ? Which has killed 10 times more in the same exact time frame.
So many People have lost complete perspective thanks to media's over the top fear mongering....
Everyday you get in your car and drive u are 10 times more likely to die than from this virus at its present state..
re vaccine.. did u have your flue shot last year? Flue killed 500k people globally last season!... if u did not u should get shot right!
Get a perspective !.
And yes, I did get a flu shot last year, as I have done for a number of years now. It only takes a few minutes and who wants to get the flu?
As for the current virus, I just returned from grocery shopping a little while ago and they're making people line up outside the store before they can enter, so that there is not too many customers in the store at one time. I stood in the rain for 10 minutes, and then I was able to finally enter the store.
I don't recall them doing that in the past ever, so these are special circumstances.
And I have zero tolerance for morons and fools who are willingly going around if they have been diagnosed as infected and they have been ordered to quarantine and they are now violating that and willingly infecting others.
I was playing World War Z the other day, and I view those people just like zombies in that game and I have no problem with them being dealt with harshly.
I am tired of this whole virus situation already, and I have no patience for those whose actions are likely to prolong the situation. The sooner things get back to normal, the better.
Anyone gathering in a church/mosque/synagogue today is a selfish PoS and exhibits criminal danger to others. So many outbreaks are being traced back to such congregations. So yes, these assholes can all be arrested for all I care, as lives will be saved. People get arrested for a LOT less.
And if you're NOT ok with measures to deter people who you know are infected from going out, I don't know what to tell you.