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Apple's China issues 'overblown,' Services underrated notes JP Morgan

Investor concerns about Apple's fortunes in China are "somewhat overblown," analysts from JP Morgan suggest, with shareholders also accused of failing to see the potential revenue generation of Apple's Services arm.




JPMorgan is lowering its near-term forecast for iPhone shipments as part of a wider outlook for global smartphone shipments as a whole, an investor note seen by AppleInsider reads. The firm however considers the market uncertainty to be "cyclical in nature," in part driven by the ongoing trade standoff between the United States and China.

"We think the low investor positioning given recent erratic behavior of the US administration warrants exposure to trade-sensitive market segments," writes JPM, "primary amongst them Apple which would benefit not only from a stronger global growth outlook but also removal of the overhang relative to targets."

The forecast for the continuous quarters from Q2 2019 to Q4 2019 is a downward shift of 4% in shipments, albeit with cyclical macro headwinds, with a marginal tweak to the 2020 and 2021 shipment forecasts. Shipment growth forecasts are maintained for 2020 and 2021, "led by larger degree of spec upgrades planned for September 2020," namely the 2019 iPhones.

The ongoing US-China situation-driven concerns by investors are "somewhat overblown," given JPM's observance of a continued decline in iPhone shipments in China over the last few years. Apple is seen to be navigating the issue "consistently" by leveraging its presence in other developed markets, and the sanctions challenges for Huawei may present an opportunity Apple could capitalize on with "adequate promotions."

On the subject of Services, JPM acknowledges the install base concerns are valid, but points out the growth in services revenue per unit is a greater driver of Services revenue, possibly twice as large as increasing the install base.

"We see considerable headroom for growth in Services revenue tracking at $2 per month over the 1.4B installed base," reasons JPM. Three opportunities are identified as being beneficial, with the first, subscriptions like Apple News+, implying up to $60 billion in increased revenue based on one per device.

The Apple Watch App Store is also a good potential revenue source, monetizing an install base of roughly 100 million devices by 2020. Lastly, Services on utilities has JPM predicting consumers being willing to spend as much as ten times the current services revenue per unit over time.

"We believe growth in revenue/unit will partly offset the impact of lengthening replacement cycles," JPM suggests.

JP Morgan currently rates Apple's stock as "Overweight," with a one-year price target of $192.74. For December 2019, the price target has gone down from $235 to $233.