Goldman Sachs slaps Apple with the lowest price target of any major research firm as analysts predict TV+ will eat iPhone profits
- Apple dropped as much as 2.3% on Friday after Goldman Sachs predicted the company's new accounting will cut into iPhones' average selling price.
- Analysts with the bank lowered their target to $165 per share from $187, setting a new lowest expectation for Apple shares among major Wall Street banks.
- The anticipated accounting method would split the $60 TV Plus free trial into a discount on the annual TV Plus membership and the iPhone's price.
- The discount will lower the phones' profit margins as the cost of producing iPhones goes unchanged, according to the analysts.
- Watch Apple trade live here.
Analysts at the bank slashed their price target for Apple stock to $165 per share from $187, bringing the lowest expectation for Apple shares among the top Wall Street banks. The 26% downside is predicated on an expected accounting method that would lower iPhones' average selling price due to the new one-year free trial of Apple TV Plus.
Apple announced Tuesday it will give all iPhone, iPad, Apple TV, and Mac customers a free one-year trial of the service. Apple TV Plus will launch November 1 for $4.99 per month, or about $60 per year.
The anticipated accounting method for the TV+ trial would bundle the year-long period with the iPhone at purchase.
For example, an iPhone 11 Pro with the TV Plus trial would show up as a $1,060 purchase with a $60 discount applied. However, this discount isn't solely applied to TV Plus revenue. A discount of 5.7% - the proportion of $60 to $1,060 - would be applied to both the iPhone's $1,000 price and the TV Plus trial's $60 price.
Assuming the phone isn't purchased with an installment plan, the iPhone would then show up as a $943.40 sale, and the TV Plus annual price would be discounted to $56.60.
This method would harm iPhone margins in future quarters as the lower average selling price arrives with no discount to cost of goods sold, according to the analysts.
The TV Plus revenue would then be realized monthly over a 12-month trial period as "deferred revenue."
"Though this might appear convenient for Apple's services revenue line it is equally inconvenient for both apparent hardware [average selling price] and margins in high sales quarters like the upcoming FQ1'20 to December," the team said.
The Goldman analysts added that the free TV Plus trial revenues would add 25% to the company's gross margin contribution. However, the overall lower product revenue will result in "a negative calculated impact to EPS of 16%" for the fiscal first quarter of 2020, according to the note.
Curiously, Goldman Sachs is one of the partners for the tech company's new credit card product. Apple Card was released in August in collaboration with the bank and Mastercard.
The Cupertino, California-based company hit 11-month highs Wednesday after revealing a new slate of iPhones and updates to its Apple Watch and iPad products. Apple traded at $219.06 per share as of 11:10 a.m. ET Friday, up about 39% year-to-date.
The tech giant has 23 "buy" ratings, 21 "hold" ratings, and five "sell" ratings from analysts, with a consensus price target of $219.19, according to Bloomberg data.
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