Summary
Analyst puts sell rating on stock with $150 target.
Reasoning has to do with product cycle disappointment.
Services growth will be key over next 12 months.
Reasoning has to do with product cycle disappointment.
Services growth will be key over next 12 months.
Shares of technology giant Apple (NASDAQ:AAPL)
dipped more than two percent on Monday, helping to lead US markets
lower. The decline came after analyst Jun Zhang at Rosenblatt cut the name to sell,
citing fundamental deterioration over the next 12 months. Today, I
wanted to examine the pieces of this note, as it would likely represent
the worst case scenario for the name.
According to a key Apple watcher, Zhung has the lowest price target
of any major analyst at $150, roughly 25% below where shares are
currently. What really interests me is the quote that Apple is not a
short, because of its cash pile and large buyback. Personally, I think
if you think a stock should be at a level this much below where it is,
you should be recommending a short position. Investors often get annoyed
with some analyst ratings like these, or times when an analyst has a
price target below where the stock is yet still has a buy rating (or a
sell rating with a higher target).
Perhaps, the most
interesting part of the note is that the analyst isn't citing just one
particular item for this negative piece. This could include items like
the China trade war that hasn't been completely solved yet, or increased
regulation on big tech names from US or foreign governments. Instead,
Zhang came out firing, basically saying Apple will disappoint
everywhere, so let's look at the main points of his argument.
- New iPhone sales will be disappointing.
- iPad sales growth will slow in the second half of 2019.
- Other product sales growth, such as the HomePod, AirPod, and Apple Watch, may not be meaningful to support total revenue growth.
- After strong service revenue growth over the last 4-6 quarters and the launch of Apple Music and news, we believe service revenue growth will also decelerate.
Since the iPhone still represents
the majority of revenues, let's start there. There are some thoughts
out there about this cycle being a little soft, primarily as consumers wait for a 5G offering
next year. The biggest upgrade focus this year is rumored to be on the
camera side, while some nice extras like sharing battery power would be
welcomed. In my opinion, the biggest item to watch will be pricing,
especially after last year's
effective pricing raise. The good news is that as we move into the
holiday quarter and beyond, the year over year comparisons get a lot
easier thanks to last year's big sales miss.
The iPad could be the big wildcard here, just because there are various reports
out there talking about either a late 2019 or early 2020 launch for new
Pro versions. Apple launched two new iPad Pro models in the fall of
2018, helping sales of the tablet in the holiday period. However, if we
look at this device's history,
the iPad Pro doesn't always get refreshed exactly a year after each
version is launched, so there's the potential that hundreds of millions
or even more than a billion worth of revenues could get pushed out of
the holiday period into a calendar 2020 quarter.
The
"other products" category is perhaps where I disagree most with the
analyst note. The Apple Watch continues to sell well as the product
continually gets better, and the second generation AirPods will probably
be just as popular or more than the original. As for the HomePod, I
wouldn't be surprised to see a price cut to stimulate sales growth,
especially if a second generation version is launched this fall.
Targeting the home and increasing wearable sales is going to be key for
Apple's next revenue leg up.
The
decelerating services growth idea is an interesting one, just because
things like Apple Music and others launched in recent years have pushed
the base number so much higher, along with the accounting change last
year that boosted reported numbers. Over the next year, investors will
closely be watching to see how News Plus, the streaming services, and
things like Apple Pay are rolled out and expanded. With so many eyeballs
focusing on the services segment as Apple's key future growth pillar,
you don't want to see negative stories like this one on News Plus, suggesting that publishers are not generating the income that was projected.
Could
Apple drop to $150 in the next year or so? It seems possible if you
consider the levels shares dropped to in the past year when iPhone sales
disappointed. However, I don't think it is as likely unless we get a
major negative turn in the US/China trade war. This is because you have
much lower expectations this time around, a higher dividend and lower
share count, along with the strong possibility that the Fed and other
central banks will lower rates to keep economic growth moving along. In
the end, I see Monday's analyst note as the worst-case scenario for
Apple.
Disclosure:
I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I
wrote this article myself, and it expresses my own opinions. I am not
receiving compensation for it (other than from Seeking Alpha). I have no
business relationship with any company whose stock is mentioned in this
article.
Additional disclosure:
Investors
are always reminded that before making any investment, you should do
your own proper due diligence on any name directly or indirectly
mentioned in this article. Investors should also consider seeking advice
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decisions. Any material in this article should be considered general
information, and not relied on as a formal investment recommendation.
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