Financial basis

Apple was the worst Dow stock on Friday

The Dow Jones Industrial Average fell nearly 350 points on Friday, despite a better-than-expected jobs report. For the week, however, the Dow finished up nearly 165 points as volatile trading continued.

No Dow Jones stock has seen a larger percentage decline than Apple (AAPL -3.86%)which fell nearly 4% today after several analysts warned of slowing App Store revenue growth. Intel (INTC -3.23%) was the second biggest loser of the day by percentage, ending the day with more than 3% down.

Although ADP reported yesterday that private payrolls in May added the fewest new jobs since the start of the COVID-19 recovery, the US Bureau of Labor Statistics reported today that nonfarm payrolls added 390,000 jobs last month. That was far more than the 328,000 jobs that most economists expected. Conflicting data is nothing new as investors struggle to determine where the economy might land over the next six to 18 months.

App Store growth slows at Apple

Morgan Stanley Analyst Katy Huberty today warned that App Store revenue growth may have started to slow in May, hinting that Apple’s services revenue could be weaker for the current quarter than many had initially thought so. Huberty pointed to data from a company called Sensor Tower that showed only 4% revenue growth in May on a year-over-year basis.

“While we believe Apple’s user spending is more resilient through all stages of the business cycle, positioning Apple better than other consumer hardware peers, a deceleration in App Store growth indicates likely a decline in consumer spending on goods/services that accelerated during the pandemic,” Huberty wrote in a research note.

Image source: Getty Images.

App Store revenue is a big component of the company’s services revenue, which accounted for more than 20% of net sales in the tech giant’s last quarter.

Huberty predicts that App Store revenue could fall by $560 million from its original forecast, which could affect its services revenue forecast for the current quarter by more than 3%.

Huberty’s rating 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 that Apple experienced in april.

“We expected growth to pick up as comps got easier, so the slowdown is somewhat surprising, especially as China saw a sharp deceleration as we anticipated some increase in lockdowns ongoing,” Daryanani wrote in a research note.

Still, even though App Store revenue growth could slow, 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 a price target of $210. Apple closed the day at $145 per share, implying a substantial rise in both analysts’ price targets.

Why Apple might bounce back

Analysts are right to suggest that Apple could face some near-term headwinds. Consumer spending could slow in the face of rising prices and interest rate hikes by the Federal Reserve, raising the cost of consumer debt and adding financial strain to consumer finances. But I would still expect Apple to be a good long-term choice.

It’s one of the biggest companies in the world and its financial position is strong – in the last quarter alone it generated more than $28 billion in operating cash flow.

Apple will also likely be a good name to hold onto amid high inflation. Although many of its flagship products are followers of consumer spending trends, the Apple brand is so powerful that it has the ability to raise prices and pass them on to the consumer without much hindsight. Eventually, supply chain issues will also hopefully disappear, presenting a tailwind for the stock.