Morgan Stanley warns on ‘below seasonal’ Apple Dec. guidance

As we edge toward Apple’s results this week, Morgan Stanley analyst Eric Woodring is “tactically cautious on Appel’s stock in the coming quarter, but says if Apple unlocks demand the firm will become more “vocally positive”.

Reasons to be cautious

The latest Morgan Stanley client note on Apple is a cocktail of optimism spiked with malaise. On the one hand, the analyst predicts Apple will post a better-than-expected Sept quarter but warns the company will guide to a “below seasonal” December quarter. For Woodring, this makes for a “tactically cautious setup”.

There are a couple of twists of good news buried here. “As we previewed earlier this month, we expect Apple to post an in-line to better than expected September quarter (F4Q23), highlighted by MSD Y/Y iPhone revenue growth, accelerating Services growth, and record gross margins. However, we are more cautious on the December quarter (F1Q24) given iPhone supply shortages and uneven consumer spending andbelieve Apple will guide to a revenue range that is both below normal seasonality and Consensus expectations,” they said.

Thinking positive

There are some catalysts for positivity, Morgan Stanley said:

• If iPhone supply improves sales may be boosted.
• If the March quarter exceeds expectations.
• Accelerating Services growth.

“With Apple shares near what we believe is a near-term floor (of $160), we are bullish over the next 12 months and remain OW with a $210 price target,” they said, before sharing some credible data points:

• Forecasted revenue/EPS: Revenue $89.9B and EPS $1.39, in-line with to slightly above Consensus (or $89.2B and $1.39, respectively).
• iPhone revenue: $45B vs. $43.6B
• Recent Canalys and IDC forecasts says Apple sold 50-53m iPhones, which is 14% above Morgan Stanley’s 48 million forecast, which suggests potential upside.
• However, Google seems to have paid a little less for traffic acquisition than the analyst had anticipated, which could impact Apple’s services income, they said.
• All the same, despite these pain points Morgan Stanley thinks Apple will announce better than expected revenue and EPS.

What about the headwinds?

There are four primary forces working against Apple as it goes into the coming December quarter:

• The quarter will be shorter than last year’s 14-week December quarter.
• The Dollar is trading at higher prices than anticipated, that may expose Apple to some foreign exchange hits/
• The analysts think there may be iPhone 15 Pro and Pro Max supply constraints.
• Mac and wearables demand remains constrained by consumers becoming cautious to spend.

These concerns drove the analysts to chop 5% off forecasts earlier this month. However, they also think the iPhone will likely “grow below normal seasonality in the December quarter (we forecast +56% Q/Q vs. +54% Q/Q in F1Q24).”

What to expect?

Apple, they think, will guide to a Q1 FY24 revenue range closer to $119-121B (2-3.5% Y/Y growth), implying $2-2.10 of EPS in the December quarter. They also note that in the last few years, Apple has usually followed a down period with a new high.

“Encouragingly, in the 7 times Apple shares have fallen more than 15% in the last 5 years, the stock has outperformed the S&P 500 by 25-30 points, on average, in the 6-12 months after bottoming,” they said.

They also speculate that the market has pretty much finished pricing in the bad news, which means any good news could have a big effect.

Apple will announce its Q4 and FY 2023 results November 2. For Apple in the enterprise fans, additional insight will likely emerge around November 8.

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