The Good, the Bad and the Ugly: Morgan Stanley Weighs In on Apple Inc., AT&T Inc. and Twitter Inc

With earnings season in full swing, Morgan Stanley analysts explain why they are bullish on Apple Inc. (NASDAQ:AAPL), cautious on AT&T Inc. (NYSE:T), and bearish on Twitter Inc (NYSE:TWTR). Here is a closer look at analysts’ thoughts on earnings trends, demand, and macro environments and how these factors impact the stock giants.

Apple Inc.

Apple earnings made headlines when the company posted year-over-year declines due to macro headwinds and slower iPhone upgrade cycles. The company posted fiscal second quarter revenue of $50.56 billion, below consensus estimates of $52 billion. However, Morgan Stanley analyst Katy Huberty remains bullish on the tech giant, though lowers her 2016 earnings estimates.

Huberty attributes Apple’s earnings, which missed expectations, to several factors. First, she notes that “Mainland China iPhone end demand only declined 5% Y/Y despite a very tough comparison,” but Hong Kong sales flailed due to the weakness of the Hong Kong dollar. Apple also experienced reductions in channel inventory because “iPhone 6s upgrades are tracking slightly ahead of the 5s but significantly lower than 6.” However, revenue derived from the App Store, Apple Music, and iPads sales came in strong.

Looking forward, Huberty notes that guidance for the June quarter is “not as bad as first feared.” The company expects to post fiscal third quarter revenue between $41 billion and $43 billion. The analyst explains this guidance “assumes the company does not meet iPhone SE demand in the June quarter, while there were no supply constraints a year ago.” As a result of the guidance, Huberty has lowered her 2016 EPS to $8, trimming $1.13 from her previous estimate. However, she remains bullish on the tech company, noting that iPhone demand will improve in the long-term thanks to an increasing user base adding to upgrade cycles and growing sales in India.

Huberty reiterates an Overweight rating on Apple but lowers her price target from $135 to $120, noting that she expects “little improvement in the next two quarters” due to “mixed macroeconomic commentary and the slower upgrade cycle highlighted by both Apple and US carriers.”

According to TipRanks, Huberty has a 60% success rate recommending stocks with a 16.2% average one-year return per rating.

Out of the analysts who have weighed in on Apple in the last 3 months, 88% are bullish on the tech giant while 12% are cautious. The average 12-month price target for the stock is $128.79, marking a 32% potential upside.


AT&T Inc.

AT&T posted first quarter earnings on April 26, leading Simon Flannery of Morgan Stanley to weigh in on the telecommunications giant. The company posted revenue of $40.5 billion, a 24% year-over-year increase thanks to its DIRECTV acquisition, though still falling slightly short of Flannery’s estimates. Diluted adjusted EPS came in at $0.72, beating Flannery’s estimate by 3 cents thanks to stronger margins.

Average revenue per user, or ARPU, came in at $55.06, marking a 3.5% year-over-year decline, slightly narrower than the analyst’s estimate of a 3.6% decline. Flannery continues, “Postpaid net adds of 129k were light, as the upgrade rate fell to 5% this quarter due to consumers holding onto phones longer. This was also coupled with higher than expected churn of 1.10%, 8bps worse Y/Y.”

Wireline results were also “mixed,” as the consumer broadband segment posted 5k net adds, which “surprised on the upside,” however, “video lost a net of 54k customers.” Flannery elaborates, “This came despite a heavy migration of U-verse customers over to DirecTV. Management expects this trend to continue given the content cost disparity between the two providers. However, AT&T continues to expect positive video adds for the year.”

Following earnings, Flannery reiterates an Equal Weight rating on the company with a $35 price target, remaining cautious on the industry at large.

Simon Flannery has a 70% success rate recommending stocks with an average one-year return of 9.1%.

According to TipRanks, 77% of analysts are bullish on AT&T, 15% are neutral, and 8% are bearish. The average 12-month price target is $41.92, marking an 8% upside.

Twitter Inc

Twitter released earnings earlier this week and did little to alleviate concerns surrounding its stagnating user base and inability to attract advertisers. Brian Nowak of Morgan Stanley remains bearish on the social media company and lowers his estimates. The company posted revenue of $594.5 million, missing estimates of $608 million.

Nowak is concerned with the company’s advertising revenue deceleration. Twitter posted $531 in revenue derived from ad sales, missing his estimates by 3%. The company then guided second quarter total revenue between $590 million and $610 million, missing his estimates by 2% and the average consensus by 12%. Twitter attributes this miss to “softer than expected branded advertiser demand,” which Nowak finds concerning because “branded dollars are one of TWTR’s largest buckets of ad revenue,” and because “the competition for social branded ad dollars from platforms with higher user engagement and (in some cases) more scale continues rising (Facebook, Instagram, Snapchat, etc).”

Overall, Nowak highlights that Twitter’s ad revenue grew 23% year-over-year in the first quarter, decelerating from 30% in the previous quarter. Taking the current guidance into consideration, the analyst believes it will decelerate further to 15% in the second quarter. He elaborates, “We see this steep deceleration continuing to pressure the multiple investors are willing to pay for TWTR as we now see TWTR’s core onplatform ad revenue growing at a slower rate than GOOGL’s Website business and Facebook’s ad business in 2016, despite TWTR being 1/30th and 1/12th the size, respectively.”

Nowak is bearish on the stock, but notes the possibility of Twitter improving its advertising offerings as a catalyst to monitor, as well as “any further success in improving its core use case and value proposition.”

Nowak maintains an Underperform rating on Twitter and lowers his price target from $16 to $14.50, marking a slight downside from current levels, as well as reduces his 2016/2017 model by 5%. Nowak has a 61% success rate recommending stocks with a 6% average one-year return per rating.

According to TipRanks, 42% of analysts are bullish on the social media company, 48% are neutral, and 10% are bearish. The average 12-month price target for the stock is $20.81, marking a 40% potential upside.


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