Morgan Stanley analyst Katy Huberty has lowered her price target on Apple Inc. (NASDAQ: AAPL) from $164 to $156 while retaining an Overweight rating on the stock. At Apple’s opening share price on Tuesday, Huberty’s price target implied a potential upside of nearly 24% for the stock.
The analysis sees increasing competition as a headwind and rising licensing revenue as the biggest driver. Morgan Stanley forces Apple’s Services revenue to rise by six points to 22% year over year. That’s up from 19% growth last year and is four points higher than the consensus. For the December quarter, Apple’s services revenue rose by 24% year over year, to nearly $17 billion.
[While k]eeping the rest of our Product-related estimates unchanged, our stronger Services forecast pushes our FY21 and FY22 total revenue estimates 1% higher, and our FY21 and FY22 EPS 1% and 3% higher, respectively. However, multiple compression over the last 2 months, primarily at Apple’s higher growth Services peers, more than offsets our higher revenue and earnings estimates, driving our new sum-of-the-parts based price target to $156, or 33xFY22 EPS, down from $164 previously.
Those “services peers” would include cloud storage providers like Microsoft and Amazon, news aggregators that compete with Apple News+, video competitors like Netflix and Amazon (again), and music services like Spotify and Amazon (again). Apple Pay is surrounded by competitors like PayPal, Venmo, Zelle and the list goes on.
Bright spots in the services business are Apple Watch and its leading position in the wearables space. The company’s enormous platform user base is both loyal and willing to pay for the Apple brand, but it is not enough to keep Morgan Stanley’s analysts from cutting the price target based on the multiple competitors that are compressing the company’s margins.
Morgan Stanley noted that Apple stock has underperformed the S&P 500 by 20 points since late January, “but we believe positive earnings revisions into what we expect to be a strong [second fiscal quarter] earnings report later this month will drive a return to outperformance, keeping us Overweight.” App Store net revenue is forecast to grow 28% year over year based on preliminary data, about four percentage points lower than December quarter growth.
However, “high-level” App Store growth trends seen in the March quarter “are reversing.” App Store downloads are off by 9% year over year compared to a record March quarter in 2020. But net revenue per download was up 40%, the strongest App Store growth per download in more than three years. On that basis, Morgan Stanley “make[s] no changes to our forecast and expect App Store growth to decelerate to +20% Y/Y growth in the June quarter and 22% Y/Y in the September quarter, resulting in FY21 App Store net revenue growth of ~25% Y/Y.”
The largest piece of Apple’s Services revenue comes from its agreement with Alphabet to make Google the default search engine for the Safari browser. Morgan Stanley estimates Apple’s fiscal 2021 revenue in its “Licensing and Other” revenue bucket to reach $13.4 billion, “16% higher than our prior revenue forecast of $11.6B and FY22 Licensing & Other revenue of $15.6B, up nearly 30% from our prior $12.0B forecast.”
It is in this bucket that Huberty believes “consensus is most under-estimating Services revenue growth.” According to Morgan Stanley, the consensus estimates for Apple’s Services revenue growth for the current year includes just 4% Licensing and Other revenue for fiscal 2021 and drops by 2% in fiscal 2022. Driven by their new estimates for Licensing and Other revenue, Morgan Stanley sees 23% year-over-year growth in fiscal 2021 and 16.5% growth in fiscal 2022.
Just before noon Tuesday, Apple shares traded at $126.79, in a 52-week range of $64.75 to $145.09. The consensus price target on the stock is $152.70, and Apple’s $0.82 per share annual dividend yields 0.65%.