Shares of Apple Inc. dropped Friday to send the technology behemoth’s market cap lower than $1 trillion, after Goldman Sachs slashed its price target on concerns that Apple TV+ act as a drag on earnings.
The stock AAPL, -2.30% slumped 2.2% in midday trading to pace the Dow Jones Industrial Average’s DJIA, +0.17% decliners. Apple’s market capitalization regained its trillion-dollar status earlier this week for the first time since November 2018, after the company showed off new iPhones and detailed pricing for its subscription streaming offerings.
Goldman Sachs analyst Rod Hall checked in on Apple in response to those announcements Friday morning, and cut his stock price target to $165, 24% below current levels, from $187, while keeping his rating at neutral, citing potential negative effects from some of the pricing decisions Apple made.
Hall said he believes Apple plans to account for its one-year free trial for Apple TV+ as a $60 discount to a combined hardware and services bundle, which will likely result in lower average selling prices (ASPs) and margins but higher services revenue growth. He sees Apple’s approach to accounting for TV+ as consistent with how embedded services such as Apple Maps and Siri are accounted for, even though TV+ clearly has a set price and can convert to an actual revenue stream after the free-trial period ends.
That might seem convenient for Apple, at a time that the company is trying to decrease its reliance on the iPhone, but Hall argues the point.
“Effectively, Apple’s method of accounting moves revenue from hardware to services even though customers do not perceive themselves to be paying for TV+,” Hall wrote in a note to clients. “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 quarter like the upcoming [fiscal first quarter of 2020] to December.”
In the most recently completed quarter, hardware revenue represented about 79% of Apple’s total sales, with iPhone revenue representing 48% and services revenue 21%. In the year-ago quarter, services revenue was 15% of total revenue.
Hall said he believes fiscal first-quarter earnings per share could be “materially lower than forecast,” as Apple’s accounting method could act as a 16% drag given lower product revenue and an increase in recognized cost of goods sold, or COGS. He said ASPs could take a 7% hit.
Apple stock is still up nearly 2% since the company’s iPhone launch event on Tuesday. It has rallied 12% over the past three months, while the Nasdaq Composite COMP, -0.15% has gained 4.6% and the Dow has tacked on 4.3%.
Apple’s stock needs to close at or above $221.28 for the company to regain its trillion-dollar status. The market cap was at $985.8 billion around midday Friday, below first-place Microsoft Corp. MSFT, -0.17% at $1.05 trillion, according to FactSet. Microsoft’s market cap has been above $1 trillion for 69 straight days, since June 7.