This week, two of Apple’s (AAPL) suppliers — companies that substantial portion of their business is supplying Apple — have cut guidance, stating that demand from one of their top customers has been reduced. Should investors be worried? Morgan Stanley’s Kathryn Huberty says no. The analyst points out that weaker supplier guidance reflects Apple’s already more cautious guidance and, importantly, doesn’t impact her Services growth forecast.
The services business continues to grow steadily, and it enjoys high-margin recurring revenue. The segment is receiving an artificial boost due to Apple adopting new revenue recognition standards, and under the new reclassification generated $39.7 billion in revenue in fiscal 2018.
Huberty commented, “Investors remain narrowly focused on units, despite the increasing value of Apple Services. As highlighted in our Insight note last week, our detailed analysis of Apple Services gives us confidence in long-term growth and valuation upside as Services becomes a key growth driver. As the smartphone market matures, Services takes the growth baton from Devices which ultimately results in more stable growth and higher margins at Apple.”
“While we believe investors should focus on Services rather than units, we provide our view on negative pre-announcements from Lumentum and Qorvo in response to investor questions. We believe Apple’s December quarter guidance incorporates these revisions as guidance was provided less than two weeks ago. Apple also provided a wider revenue guidance range ($4B) than normal ($2B) to reflect greater demand uncertainty given the higher number of new product launches and greater macro uncertainty in the economy relative to 12 months ago. Importantly, unit revisions are typically more severe for the supply chain than Apple given inventory fluctuations and more bullish orders to ensure adequate supply early in a product launch,” the analyst continued.
Bottom line: Huberty reiterates an Overweight rating on Apple stock, with a price target of $253, which implies an upside of 30% from current levels. (To watch Huberty’s track record, click here)
Other initial sentiment on the Street matches Huberty’s bullish take, as TipRanks analytics exhibit AAPL as a Buy. Based on 35 analysts polled in the last 3 months, 21 sing the praise of Apple stock, 13 prefer to sit on the sidelines, while only one wears a bear custom. The 12-month average price target stands at $238, marking a nearly 23% upside from where the stock is currently trading. (See AAPL’s price targets and analyst ratings on TipRanks)