Morgan Stanley: Deceleration In China Could Leave Apple Services Revenue Below Consensus

China seems to be emerging as Apple Inc. AAPL's Achilles' heel, with the sell-side harping over its potential impact on the iPhone maker. 

The Analyst

Morgan Stanley analyst Katy Huberty maintained an Overweight rating on Apple with a $247 price target.

The Thesis

Apple's App Store revenue may have hit a softer-than-expected $3.6 billion in the September quarter, Huberty said in the Wednesday note. (See her track record here.) 

The estimate is based on data compiled by Sensor Tower, which showed the App Store generated $8.4 billion in payments to developers in the quarter.

China is the single largest revenue-generating country for the App Store, fetching it a little more than $1 billion in net revenue during the quarter and accounting for about 29 percent of total App Store revenues, the analyst said. 

Yet growth in China App Store revenue has been decelerating for about eight consecutive quarters, with the September quarter likely to have seen a slowdown in growth to 16 percent, Huberty said. 

The slowdown in gaming-related App Store revenues in China is primarily due to the pause in gaming license approvals by Chinese regulators and is expected to last through the rest of the year, she said. 

If other Services rake in revenues in line with estimates, Morgan Stanley projects September quarter Services revenues of $9.8 billion, below Morgan Stanley's $10-billion estimate and the $10.1-billion consensus estimate. 

Exposure to China is the biggest near-term risk for Apple given slower Chinese gaming approvals and the implications of escalating trade tensions, Huberty said. 

That said, Morgan Stanley believes many of the "App Store blemishes" are transient, and remains bullish on the longer-term sustainability of App Store growth.

The Price Action

Apple shares have gained about 32 percent year-to-date.

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Photo courtesy of Apple.