Why Morgan Stanley Is Wrong About Apple Inc. (NASDAQ: AAPL): China, Production Decline and Competition


Apple Inc. (NASDAQ: AAPL) stock is in the limelight after Morgan Stanley recommended investors to buy the tech stock. The firm believes that worst case scenarios are already priced in Apple stock.

Apple is expected to announce quarterly results next week. Analysts expect Apple to report a weak quarter. Earlier in January, Apple slashed its revenue guidance by 8%, as CEO Tim Cook sent a bombshell letter to investors, warning of further problems in the future. Cook said that lower-than-expected demand for iPhone and problems in China are the reasons of the guidance cut.

iPhone accounts for about 60% of Apple’s revenue, but Apple has started to feel the heat as users around the world now prefer to get their iPhones repaired instead of buying new ones.

However, Morgan Stanley believes things will get better for Apple stock after upcoming services launches and bullish iPhone cycles. The firm’s analyst Katy Huberty believes that the recent pullback is an “attractive” entry point for investors.

The analyst gave a 12-month price target of $211 to Apple stock.

China Fears

There are extremely bleak chances of any short-term recovery for Apple Inc. (NASDAQ: AAPL) stock. The company is quickly losing ground in China, which accounts for about 20% of iPhone sales. Apple is being uprooted in China by other players which make smartphones in low cost. In the first three quarters of 2018, Apple’s market share in China fell to 7.8% from 12.5% in 2015, according to market research firm Canalys.

Services Business Isn’t Enough

Apple services business, which Morgan Stanley is bullish about, is strongly linked to the company’s ecosystem which is based on iPhone. The services business alone cannot save Apple. Problems for the company will increase amid lack of growth in the smartphone industry. In a latest report, Credit Suisse estimates that smartphone production will plunge by a whopping 19% in 2019, with no bottom in sight.

Legendary investor David Einhorn also recently exited Apple Inc. (NASDAQ: AAPL) stock. In a letter to investors, the investor cited a possible trade war with China and valuations concerns as biggest reasons of selling Apple stock. Management services company D.A. Davidson recently downgraded Apple stock price target to $245.00.

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Author does not have investment in stock discussed in this article.

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