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Goldman Sachs raised its price target on Apple in a note that focused on how growth in the tech giant's services business may fall short.
"Apple App Store data from Sensor Tower suggests a material slowdown in May and June revenues after a spike in activity in March and April driven by Greater China," analyst Rod Hall said at the start of the note to clients. "Our current Services revenue growth estimate is 15.1% Y/Y in FQ4 (September), down slightly from 15.7% Y/Y in FQ3 (June) and below consensus of 16.6%."
The analyst says the services spike earlier in the year was likely due to the launch of a couple games in China. And Hall notes that if the weak June trend continues, then Goldman would have to take down its estimate for services revenue this quarter even further. Services are now a key focus for Apple because smart phones have reached near-peak penetration.
But in a prime example of the sentiment driving the whole stock market today, the analyst raised his price target on Apple for one reason: The Federal Reserve is driving down interest rates and therefore raising stock market multiples.
"We are increasing our 12-month price target to $187 from $171 based on 15.4x P/E vs. the 14.1x P/E we were previously using to reflect a higher S&P 500 P/E multiple and an unchanged 10% discount to that multiple," Hall wrote.
In other words, investors are paying more for each dollar of earnings for the whole stock market so they will do the same for Apple. Apple has traditionally traded at a discount to the stock market because of its large size and cash position. Even with that discount, Apple gets a higher multiple given today's attitudes of investors.
And yet that new price target from Goldman is still 9% below Apple's close of $204.50 on Tuesday. Hall kept his neutral rating on the stock.
Normally a price target raise from Goldman Sachs would cause a stock to hop. But the shares barely budged in Wednesday premarket trading as investors dug into the report.
Apple reports earnings on July 30. The shares are up 29% this year.
— With reporting by Michael Bloom