Morgan Stanley continues to see Apple as a top stock pick
On the surface, Apple Inc. wouldn't appear to have the most optimal setup.
The consumer-electronics company has been facing "weaker consumer electronics spending, a challenging macro backdrop, [foreign-exchange] headwinds, iPhone production shortages, and lingering COVID restrictions"--all factors that could drive the company to its first fiscal year of revenue and earnings declines since 2019, according to Morgan Stanley analyst Erik Woodring.
Looking more deeply, however, Woodring thinks Wall Street is overlooking numerous compelling parts of Apple's (AAPL) story that could play out "beyond the near-term."
He cheered "a catalyst-rich event path over the next 12 months that is underappreciated by investors, including reaccelerating iPhone and Services growth, record gross margins, two new product launches, and the potential introduction of an iPhone subscription program."
These "5 underappreciated catalysts" could drive a "re-rating" of Apple's stock, in his view, meaning that they could prompt investors to assign a higher multiple to the name. Apple remains Woodring's top pick, and he boosted his price target to $180 from $175 in a Friday note to clients.
Woodring sees pent-up demand for iPhones, a trend that could help spur a reacceleration in device shipments during fiscal 2024 that's more robust than what's currently baked into consensus expectations.
Services growth could also pick up after a slowdown that's "concerned" investors.
"However, underlying this deceleration has been the most extreme FX headwinds the company has faced as far back as we've tracked the data, which suggests that in constant currency, Services has still been growing low double-digits," Woodring noted, versus the mid-single-digit growth the company has seen recently.
The services business could reaccelerate going forward, in his view, as Apple starts cashing in on the hundred-million-plus new users that joined its ecosystem last year and benefits from price increases on services like Apple Music and Apple TV+.
Additionally, Woodring thinks that Wall Street isn't giving the company enough credit for its margin potential.
"Perhaps what is most underappreciated by investors today is just how strong Apple's underlying gross margins are when adjusting for FX headwinds, which we estimate were 46% in the Dec Q, and are likely to reach nearly 47% in the March Q," he wrote.
He sees about 150 basis points of upside to consensus expectations for Apple's gross margins in fiscal 2023 and 2024.
There could also be some excitement later this year as Apple prepares to debut its next iPhone model and the augmented reality/virtual reality headset that's been rumored to be in the works.
"History shows you want to own Apple stock 6-9 months ahead of key product launches, with Apple's new AR/VR headset and the iPhone 15 launch both key upcoming catalysts," according to Woodring.
Finally, he's upbeat about the possible launch of a hardware subscription program, which could get Wall Street to think about Apple's stock differently.
"What gets us most excited as an Apple analyst today is the business model transformation Apple is undergoing, shifting toward a model focused on installed base monetization rather than unit growth, which in our view, increasingly argues for a valuation more commensurate of a subscription-like business vs. valuation today that is more reflective of a high-quality technology platform."