Goldman Sachs cut its price target for Apple shares to $165 from $187, making the firm’s expectation for Apple the lowest of the major Wall Street banks.
Goldman Sachs just significantly slashed its price target for Apple, predicting 26% downside to the shares because of a “material negative impact” on earnings for the accounting method the iPhone maker will use for an Apple TV+ trial.
“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,” wrote Goldman analyst Rod Hall, in a note. “Effectively, Apple’s method of accounting moves revenue from hardware to Services even though customers do not perceive themselves to be paying for TV+. 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.”
Hall explained that Apple has taken “a very similar approach” to its accounting methods before, for so-called “embedded services” such as Apple Maps and its Siri artificial assistant. The Goldman analyst expects the free trial TV+ revenues will add 25% to Apple’s gross margin contribution, which, due to the lower product revenue, will result “in a negative calculated impact to EPS of 16%” for fiscal first quarter 2020, Hall said.
MacDailyNews Take: Hall is assuming the free trial for customers buying any new iPhone, iPad, Apple TV, Mac or iPod touch to last for one year, which makes sense, as Apple will have built up an audience and the makings of a content library after Apple TV+’s first year.
Read the full CNBC article for an example of how Hall expects Apple to account for Apple TV+’s one year free trial for buyers here.