Apple Gains as Services Growth Reassures Skeptical Investors

(Bloomberg) -- Apple Inc. rallied on Wednesday despite reporting its first holiday-quarter sales decline in nearly 20 years. Analysts viewed the results as “better than many had feared,” according to Piper Jaffray analyst Michael Olson, who said some trends were stabilizing after a rough fourth quarter that saw Apple shares slump more than 30 percent.

The stock gained 5 percent and traded at its highest level in more than a month. Many analysts saw a positive takeaway, including Apple’s growing services business and other devices, even as they trimmed earnings estimates and price targets on the iPhone maker.

Here’s what analysts are saying:

Morgan Stanley (Katy Huberty)

Sentiment going into the results “became overly negative, ignoring the strength of Apple’s platform. Importantly, non-iPhone revenue grew 19%, ex-China revenue grew, and newly disclosed iPhone installed base and Services subs hint at sustained Services growth.”

Lowers price target to $197 from $211 but keeps overweight rating. Apple “made investors feel better about several recent debates,” including iPhone demand, margin risk, and the rate of growth in services.

Canaccord Genuity (Michael Walkley)

Trims price target by $5 to $185 and forecasts a 12 percent decline in 2019 iPhone unit sales.

Reaffirms buy rating, writing that “while the smartphone market is slowing to low single digits annual growth, Apple’s dominant profits of the world’s largest consumer electronics market is likely to continue.”

Baird (William Power)

“Services gross margins, disclosed for the first time, looked strong. In addition, the subscription forecast and disclosure of 900 million iPhone users highlighted the broader services and eco-system opportunity, key to our positive thesis.”

Affirms outperform rating and $185 price target.

Nomura Instinet (Jeffrey Kvaal)

Lowers price target by $5 to $170, citing the “weak” second-quarter outlook. Affirms neutral rating.

“We believe iPhone volumes are on a sustainably lower trajectory than expected even after the preannouncement. Services growth, however, seems to have stabilized at a healthy, if lower, 20% rate.”

PiperJaffray (Michael Olson)

The outlook was “better than many had feared,” and “with the ’bad news,’ which turned out not as bad as expected, out of the way, some that had been sidelined will likely re-visit the stock.” Affirms overweight rating and $187 price target.

Goldman Sachs (Rod Hall)

“Overall, we did not pick up any signs of either weakness or improvement in the underlying business trends for Apple. We are concerned that prolonged economic weakness in key markets like China could continue to hurt the company’s performance this year.”

Keeps neutral rating and $140 price target but trims 2019 expectations for earnings and revenue.

Bloomberg Intelligence (John Butler)

“Apple faces a range of problems in its core iPhone franchise, particularly in China, none of which can be addressed with a quick fix.”

Measures taken to address such issues, including a used iPhone trade-in program and an installment-payment plan, “should ease some pressure, but Apple’s 2Q outlook suggests it will take several quarters to work through its burgeoning growth challenge and get back on a solid track.”

Bernstein (Toni Sacconaghi)

The results and conference call “reaffirmed our concern that several structural headwinds exist to iPhone’s business,” including longer replacement cycles, “natural limits to pricing,” and “a strategically challenged position within the China market.”

So far, Apple’s responses to these issues are “more tactical than strategic, underscoring the challenges.”

Affirms market perform rating and $160 price target.

Jefferies (Timothy O’Shea)

The gross margin for Apple’s services division was “not enough to offset the eroding margins in the hardware business.” The hardware business is “beset by a number of issues including China macro, lengthening smartphone upgrade cycles,” and foreign-exchange headwinds, “issues unlikely to be fixed in the near term.”

Lowers earnings and revenue forecasts for both 2019 and 2020. Also trims near-term profit estimates for the third time in two months.

To contact the reporter on this story: Ryan Vlastelica in New York at rvlastelica1@bloomberg.net

To contact the editors responsible for this story: Catherine Larkin at clarkin4@bloomberg.net, Scott Schnipper

©2019 Bloomberg L.P.