Sep 13, 2019

Apple Argues Over Goldman Sachs' Report On TV+ Discount Could Hurt Earnings

Financial firm Goldman Sachs has just cut Apple's target price significantly, and Apple is anticipated to drop by up to 26%. The accounting method used by the iPhone maker during the Apple TV+ trial period will have a severe adverse effect on earnings. Goldman Sachs analyst Rod Hall expects Apple would account one-year trial of Apple TV+ a $60 discount on hardware and service portfolios.

Hall believes that Apple's accounting method shifts revenue from hardware to services, although customers do not believe they are paying for services. While this accounting approach seems suitable for Apple's service revenue line, it is also disturbing for average hardware sales prices and gross margins in the upcoming peak sales seasons such as the first quarter of December 2019 to February 2020.


Goldman Sachs lowered Apple's 12-month target price from $187 to $165 and rated Apple stock as neutral.

According to TipRanks.com, Hall's target price is the lowest among Wall Street's major banks and the fifth-lowest among all analysts covering Apple.

Goldman Sachs did not accuse Apple of accounting miscalculation, but they believe that TV+ free trials will affect hardware profit margins, and investors will react negatively.

Hall explained that Apple has also adopted a very similar accounting system, the so-called "embedded services", such as Apple Maps and its Siri virtual assistant. The Goldman Sachs analysts expect that a free trial of TV+ revenue will increase Apple's gross margin by 25%, and this will hurt the EPS of the first quarter of 2020, due to a decline in product revenues.

Hall added that the current conclusion is based solely on the assumption of Apple TV+ one-year trial. If the trial period is extended, adjustments may need to be made.

Hall, for instance, purchased a new iPhone 11 Pro for $1,000 (Hall rounded up to $999 to make the instance clearer). Apple considers this purchase as a bundled set because you're going to get an iPhone 11 Pro and a year's TV+ subscription worth $1,060. But the $60 discount for TV+ isn't just for TV+ income, Hall said, instead Apple has to divide the discount into two components.

Hall calculated that the combined discount was 5.7%, which is $60 divided by $1,060. Applying this result to the bundled package, the iPhone has a discounted price of $943.40 (or 94.3% of $1,000) and TV+ has an annual discount of $56.60 (or 94.3% of $60). Hall found that assuming that the iPhone was not purchased in installments, the iPhone's profit was lower because the average cost of the iPhone was lower, since the cost of goods was not affected by Apple's discount. However, Hall also expects that the discounted TV+ revenue will be recorded as “deferred income” and then “confirmed monthly during the 12-month trial period”.

Hall ended by saying that under this accounting procedure, the average selling price in the first quarter and the 2020 fiscal year may be dragged down by 7%.

Apple in defense said that It is not expected that the implementation of Apple TV+ will have an effect on its financial results. "We do not expect the introduction of Apple TV+, including the accounting treatment for the service, to have a material impact on our financial results," the company said in a statement to CNBC.

Image Via Market Insider

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