Apple (AAPL) Stock Just Lost a Bull; Here’s Why

Maxim's Nehal Chokshi now angles for 7% in return potential for AAPL stock.


Apple NASDAQ:AAPL) investors, watch out. Maxim analyst Nehal Chokshi warns of a risky, rocky fiscal 2019 up ahead for the tech giant. Between the smartphone market now on a downturn and long-term potential for subscription services that is frankly “not attractive enough” anymore, the analyst has fled the bullish camp on Apple.

As such, the analyst downgrades AAPL stock from a Buy to a Hold rating while cutting the price target from $204 to $200. This implies a close to 7% upside from current levels. (To watch Chokshi’s track record, click here)

“Prior survey data indicates attach rates for subscription services will be at best 30%, likely lower given ecosystem centric approach, especially for services where entrenched incumbents exist. Utilizing SPOT, DBX & NFLX consensus estimates, we believe AAPL subscription services at maturity will yield at best a corporate 25% operating margin,” underscores Chokshi, who alerts that he spots “high risk that FY19 will be a down year given smartphone market now in decline.”

For context, consider an attach rate representative of the ratio of sales of a primary product to a company’s related secondary product, a traditional metric in marketing and sales utilized to size up strategies to performance.

Chokshi has run the numbers, creating a thorough average revenue per user (ARPU) plus attach rate driven model for the company’s multiple subscription services, as well as those like subscription services, from the app store to Apple Pay to Apple Music to iCloud to forthcoming features of Apple News and Apple video in long-form. Accordingly, the analyst estimates these subscription businesses can rise to $52 billion by fiscal 2022 from a present-day roughly $12 billion yearly run rate. The verdict: Chokshi calculates an attach rate ranging in wide variability. Data points of Apple News at a “low” 10% attach rate to the highest of iCloud with 50% leading the analyst to size up an attach rate for U.S. based iPhone users of 9% for iWork, or Apple’s office productivity suite, 32% for Maps, as well as 77% for Safari.

“We believe the widely varying attach rate is a result of: (1) how entrenched are competitive services and (2) higher AAPL attach rates correspond to lower differentiation for competing products. We note that our proprietary survey data on the free AAPL services should also be haircut when applied to the paid services,” notes the analyst.

Additionally, the analyst sees the tech titan to date having cultivated a “services ecosystem centric,” a factor he wagers “drives away iPhone users that are also Windows operating system users.” In the scope of Chokshi’s survey data, merely an approximate 32% of iPhone users are likewise Mac users, translating to roughly 68% of iPhone users that “would likely shun the AAPL subscription services.”

Chokshi continues pinpointing a 30% attach rate as reasonable for AAPL Music, a platform that though has been available for around 3 years, has “achieved only ~6% penetration of the iPhone user installed thus far.”

In the near to mid-term, the analyst cautions he does not predict Apple will grab share in another market that will be as prevalent as the smartphone market or garner substantially more than what the company captures of around 17%. Therefore, the analyst does not anticipate “a halo effect to support the iPhone franchise” here, even as the smartphone user base continues to rise.

Glancing ahead, fiscal 2019 poses risk to the company to sustain or even forfeit “modest” market share, leading Chokshi to scale back his iPhone expectations as he anticipates a 7% year-over-year dip to 208 million units (from 223 million units). Now, the analyst anticipates 3% less from Apple in fiscal 2019 revenue, calling for $258 billion, which dips 5% under the Street’s $272 billion forecast, along with 5% less in EPS to $12.62, likewise 5% shy of the Street’s $13.27 projection.

TipRanks suggests the cautious analysts almost match up against the bulls rooting for the big AAPL machine’s opportunity. Out of 28 analysts polled in the last 3 months, 15 are bullish on AAPL stock while 13 remain sidelined. With a return potential of 4%, the stock’s consensus target price stands at $194.83.

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