Morgan Stanley: Buy The Dip In Apple

A five-session sell-off in Apple Inc. AAPL shares was stalling Thursday after Morgan Stanley painted a positive picture of the company's Services business.

The Analyst

Morgan Stanley's Katy Huberty maintained an Overweight rating on Apple with a $253 price target.

The Thesis

The pullback in Apple shares is an overreaction and is orchestrated by weak prognostication for iPhone volume but any resultant impact on the financial results could be made good by the Services business and the buyback program, Huberty said in a note, according to Bloomberg. (See the analyst's track record here.)

Amid a maturation of the smartphone market, growth dynamics will tilt toward the Services business and away from devices, helping to stabilize growth and push margins higher, she said.

"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."

Morgan Stanley is not sold on the idea that a weaker outlook at Apple suppliers could be detrimental to Apple shares.

The cautious guidance for the December quarter that encompasses the holiday season may not affect the growth forecast for the Services business, as it is tied to the installed base rather than new shipments, the analyst said.

Data points do not dictate stock price, particularly beyond a one-month time frame, Huberty said.

China remains a wildcard and poses the biggest risk to iPhone demand in 2019, she said.

In the event of a recession, the Service business could see deceleration in growth, but not contraction, contraction, the analyst said. About 25 percent of Apple Services revenues are subscription-based, up from 8 percent in 2015, she said.

"With Services and a committed buyback fueling the majority of EPS growth, we believe the company is better positioned to weather an economic slowdown relative to Apple's iPhone dependent growth globally."