Morgan Stanley says Apple Services continuing to grow, but warns of future challenges

Investment bank Morgan Stanley has warned that, although Apple is continuing to enjoy strong revenue and growth in its services division, the company faces future challenges.

As a result, the bank downgraded its price for AAPL from $164 to $156, signalling increased performance from its competitors. Speaking in an investment note, a spokesperson for the bank said: “Services strength drives estimates higher but peers multiple compression drives PT lower to $155 (from $164). Following strong March quarter App Store results and an analysis of the key drivers of Apple’s Licensing and other segments, we raise our already above-street FY21 and FY22 Services revenue estimates by 3% and 5% respectively and are increasingly convinced that consensus Services forecasts over the next 2+ years are too low.”

“We now forecast Apple Services revenue growth accelerates by 6 points to +22% Y/Y in FY21, up from +19% Y/Y previously, nearly 4 points ahead of FY21 consensus Services growth of +18% Y/Y. Keeping 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 33x FY22 EPS, down from $164 previously.”

To summarize, the bank believes that, because other companies in the same sectors as Apple operates are seeing their share prices fall, Apple cannot be immune and is likely to suffer future challenges. Apple will next issue an earnings report on April 28, where we’ll hear more about how the company’s services arm’s fared, particularly in light of COVID-19.

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