Apple Slips After Goldman Slashes Price Target Due To TV+ Accounting Drag
Shares of Apple (AAPL) slipped in Friday morning trading after Goldman Sachs lowered its price target for Apple shares to $165 from $187, saying that accounting for a planned Apple TV+ free trial is likely to have a material negative impact on average selling prices and earnings.
APPLE TV+ FREE TRIAL SEEN HURTING REPORTED FIGURES:
Goldman Sachs analyst Rod Hall maintained a Neutral rating on Apple shares and lowered his price target on the stock to $165 from $187 after adjusting his estimates in the wake of the company's recent "Special Event" and iPhone unveiling. In a research note to investors, Hall said he thinks Apple plans to account for its 1-year trial for TV+ as a $60 discount to a combined hardware and services bundle, which he said “effectively moves revenue from hardware to Services even though customers do not perceive themselves to be paying for TV+."
He predicts a 26% downside for the stock because of a "material negative impact" on earnings per share for the accounting method the company will use for an Apple TV+ trial, as well as lower up front Average Selling Prices and margins. "Though this might appear convenient for Apple’s services revenue line it is equally inconvenient for both apparent hardware ASPs and margins in high sales quarters like the upcoming 1Q20 to December," Hall added.
The analyst noted that Apple has taken a "very similar approach" to its accounting methods before, for "embedded services" such as Apple Maps and Siri. The Goldman analyst expects the free trial TV+ revenues will add 25% to Apple's gross margin contribution, which, due to the lower product revenue, will result "in a negative calculated impact to EPS of 16%" for the first quarter of 2020. He added that "We currently assume this is an introductory offer that runs for just one year. Should it run longer our out year forecasts would also likely need to be adjusted in a similar way."
Assuming 25% gross margin contribution from free trial TV+ revenues, he estimates a 14% drag on EPS for FY20, but no impact to cash flow, Hall said.
PRICE ACTION:
In morning trading, shares of Apple are down 1.1% to $220.60.
Disclosure: None.