Apple Hemorrhaging Halts as Morgan Stanley Touts Services Unit

(Bloomberg) -- A selloff in Apple Inc. shares is overdone, with investors fretting too much about iPhone unit sales and ignoring the potential of its growing services business, according to Morgan Stanley, which affirmed its overweight rating and $253 price target on the stock (average analyst PT $231).

Shares rose 0.7 percent pre-market.

Apple has dropped about 16 percent since early November, including in each of the five past sessions, largely on concerns that its flagship iPhone line is seeing weaker demand; a number of Apple suppliers have recently cut forecasts, while Apple itself said it would stop disclosing unit sales.

Morgan Stanley described the pullback as an overreaction and recommended buying the stock on the “unit-driven pullback” as Apple’s services business and stock buyback program will drive future earnings.

The selloff “suggests investors remain narrowly focused on units, despite the increasing value of Apple Services,” it wrote to clients. “As the smartphone market matures, Services takes the growth baton from Devices which ultimately results in more stable growth and higher margins at Apple.”

Analysts led by Katy Huberty wrote that while investors appreciate the value of the services business -- in late October, Jefferies calculated services could account for 25% of Apple’s revenue and 40% of gross profit by fiscal 2022 -- the transition would be rocky for the shares.

“News flow around units is creating volatility and a buying opportunity while the investor base is still in the process of transitioning away from units,” the report read.

Morgan Stanley dismissed the idea that weaker outlooks from suppliers meant that Apple shares were likely to continue struggling.

“A look back at the past seven negative revision[s] at iPhone suppliers suggests these data points don’t predict future share price performance, particularly beyond a one month period,” Morgan Stanley wrote, adding that “China remains a wild card and the biggest risk to further pressure on iPhone demand next year.”

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, Brad Olesen

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