Apple’s stock is overvalued, says a Wall Street analyst.
Goldman analyst Rod Hall, who carries a neutral rating on the stock, cut his price target on the group to $165 per share, from a prior level of $187, arguing the free trial period would “likely result in lower up front (average selling prices) and margins” and hurt the group’s gross profit and earnings per share in the coming year.
Goldman argues that the stock will fall because the accounting method used for an Apple TV+ trail will have a “material negative impact” on earnings, CNBC reported. Hall writes, “We believe that Apple plans to account for its 1-year trial for TV+ as a ~$60 discount to a combined hardware and services bundle.”
“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. “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 quarters like the upcoming FQ1’20 to December.”
“We are modifying our model to account for this change but we currently assume this is an introductory offer that runs for just one year,” he added. “Should it run longer our out-year forecasts would also likely need to be adjusted in a similar way.”
Apple said earlier this week that is Apple TV+ offering will be priced at $4.99 USD after a one-month free trial, but noted that buyers of new Apple hardware would be offered the service free for up to one year.
Update: Apple has now disputed this report, telling CNBC: “We do not expect the introduction of Apple TV+, including the accounting treatment for the service, to have a material impact on our financial results.”