Apple’s iPhone unit sales may be declining, but a Morgan Stanley analyst says concerns are overblown — and investors may be missing the bigger picture.
In a new investors note, Morgan Stanley’s Katy Huberty is insisting that investors are remaining “narrowly focused on units, despite the increasing value of Apple Services.” She is, of course, referring to the 8.5 percent decline in Apple shares since news of weakened iPhone sales spread.
That news, combined with relatively stagnant iPhone growth reported during Apple’s most earnings call, has lead many market watchers to predict a doom-and-gloom scenario for the Cupertino tech giant.
Not The Entire Story
But that’s not the entire story, Huberty said. She referenced past research notes that declared Services could overtake the iPhone as Apple’s primary driver of new growth.
“While investors generally support our Services thesis, 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,” Huberty wrote.
As the analyst puts it, the global smartphone market is reaching maturity and its growth, as a result, is stalling. But that could give Services the opportunity to “take the growth baton form devices.” That’s an unprecedented scenario for Apple, who has always been a device-focused company.
Additionally, Huberty notes that unit order revisions are typically worse for supply chain partners than Apple itself. She adds that Apple will likely reach its normal run rate production earlier than normal — citing a lack of production constraints.
Basically, the analyst contends that Apple has cut its supply chain unit orders in November, rather than December or January.
She advised investors to look at previous negative revision reports from the iPhone supply chain because “these data points don’t predict future share price performance, particularly beyond a one-month period.”
Concerns with Services
There may be some concerns with Services, however. Apple has been increasingly investing in what investors see as low-margin Services businesses — like Apple Music and a rumored original TV content subscription platform.
In response to those concerns, Huberty writes that Apple could easily increase its gross margin. That’s largely due to high-margin services, like the App Store and Licensing, as well as increasing margins from AppleCare and iCloud.
“These dynamics actually argue for Services margins expanding in the next few years,” Huberty writes.
She forecasted a potential 60 percent gross margin with 20 percent revenue growth year-over-year. That’s in contrast to the current “flattish device business,” which has a 35 percent gross margin.
Rise of Services
Morgan Stanley has long predicted the eventual rise of Services as Apple’s chief driver of growth. And it’s not the only investment firm to note Services’ trajectory. This week, Loup Ventures analyst Gene Munster also advocated for investors to see “Apple as a Service” rather than a traditional device manufacturer.
It’s worth noting that AAPL seemingly rebounded in the wake of Huberty’s note, according to Barron’s. As of the writing of this article, Apple’s stock price was up 2.72 percent.