It is not every day that Apple (NASDAQ: AAPL) shares receive a seller class that is beaten on them. New Street Research had dropped its rating on the Mac manufacturer to sell in August last year, and HSBC just followed downgrading Apple to "reduce" its bank equivalent to a self-rating. HSBC had previously downgraded the stock to neutral back in December. At that time, HSBC analysts expressed concern about slowing down hardware growth and overreliance on the iPhone. "Revenue is only supported by higher sales prices and by service development," HSBC said last December.
Here's why HSBC is bearish at Cupertino tech giant, and allocates $ 1
Apple is "too late for the game" and the services will take a long time to pay
The core of HSBC's dissertation is an expectation that Apple's slew of first-party services unveiled last month will underperform and end up taking a lot longer time to create a noticeable impact on the company's huge business. At the same time, analyst Erwan Rambourg believes that Apple deserves some credit to invest aggressively in its service business.
"Recent service announcements have Apple putting in money where the mouth is, but returns may take some time to pull out," Rambourg wrote. "While the new deals can provide consumer attention, we do not expect these services to move the needle significantly. We believe that Apple has come too late for the game and the offer [s] largely does not differ much or is under par for offers from competition."
Rambourg also believes that the new services will have lower margins than the rest of Apple's service segment, as they appear to be more costly than other services in the service portfolio. Original video content is notoriously expensive, for example, and the Apple TV + margins are likely to be modest. In January, the tech titan revealed gross margin data for its service business for the first time, revealing services generated a gross margin of 63% in the fourth quarter.
HSBC does not believe the new services will gain much traction in emerging markets either, potentially adding other ongoing challenges the company has had in these regions. CEO Tim Cook particularly pointed to growth in emerging markets when he warned investors that Apple missed its guidance in the fourth quarter. It is worth noting that the company has just made an aggressive price decline for Apple Music in India, undervaluation ranks Spotify, recently launched in India.
In addition, the new services are not likely to help Apple sell more hardware, which still represents the majority of total revenue and gross profits. The product gross return amounted to 79% of total gross profit in December, analyst note.