The Dow Jones Industrial Average dropped close to 350 points on Friday, despite a better-than-expected jobs report. For the week, however, the Dow Jones finished higher by nearly 165 points as volatile trading continued.
No stock in the Dow saw a bigger percentage drop than Apple (AAPL 1.15%), which fell nearly 4% today after several analysts warned about slowing App Store revenue growth. Intel (INTC -0.99%) was the day’s second-biggest loser on a percentage basis, finishing the day more than 3% down.
Although ADP reported yesterday that private payrolls in May added the smallest number of new jobs since the COVID-19 recovery began, the U.S. Bureau of Labor Statistics reported today that nonfarm payrolls added 390,000 jobs last month. That was much stronger than the 328,000 jobs that most economists had been expecting. The conflicting data is nothing new, as investors struggle to try and figure out where the economy could land over the next six to 18 months.
Slowing App Store growth at Apple
Morgan Stanley analyst Katy Huberty warned today that App Store revenue growth may have started to slow in May, hinting that services revenue at Apple could come in weaker for the current quarter than many had initially thought. Huberty pointed to data from a company called Sensor Tower that showed just 4% revenue growth in May on a year-over-year basis.
“While we believe Apple user spending is more resilient at all stages of the economic cycle, which positions Apple better than other consumer hardware peers, a deceleration in App Store growth likely points to fading consumer spending on goods/services that accelerated during the pandemic,” Huberty wrote in a research note.
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App Store revenue is a big component of the company’s services revenue, which made up more than 20% of net sales in the tech giant’s most recent quarter.
Huberty projects that App Store revenue could fall by as much as $560 million from her initial forecast, which could hit her services revenue forecast for the current quarter by more than 3%.
Huberty’s note is the second warning this week from analysts. Evercore analyst Amit Daryanani also noted yesterday that the 4% growth is weaker than the 9% year-over-year App Store revenue growth Apple saw in April.
“We had expected growth to accelerate as comps became easier, so the slowdown is somewhat surprising, especially as China saw a large deceleration when we were anticipating some uplift from the ongoing lockdowns,” Daryanani wrote in a research note.
Still, even though App Store revenue growth might be slowing, both Huberty and Daryanani are bullish on the stock. Huberty has an “overweight” rating on Apple and a price target of $195. Daryanani also has an “overweight” rating and price target of $210. Apple closed the day at $145 per share, implying substantial upside to both of the analysts’ price targets.
Why Apple could bounce back
The analysts are right to suggest that Apple could face some near-term headwinds. Consumer spending could slow in the face of higher prices and as the Federal Reserve raises interest rates, which increases the cost of consumer debt and adds financial strain to consumer’s finances. But I would still expect Apple to be a good long-term pick.
It’s one of the largest companies in the world and has a strong financial position — just last quarter it generated more than $28 billion of operating cash flow.
Apple will also likely be a good name to hold in the midst of high inflation. Although many of its flagship products are partial to consumer spending trends, the Apple brand is so powerful that it has the ability to raise prices and pass those onto the consumer without too much pushback. Eventually, supply chain issues will also hopefully clear, presenting a tailwind for the stock.
