The first quarter of the year saw more institutional investors sell AAPL than buy it, according to a new report today. While the fall in institutional share ownership is a small one, this is still the largest sequential decline since 2013.

Morgan Stanley says there are two reasons for this – but many more reasons to believe in AAPL …

PED30 saw the Morgan Stanley investment note.

Apple’s institutional ownership falls ~60 bps Q/Q, the largest Q/Q downtick since 2013. Apple’s institutional ownership fell -58 bps Q/Q to 4.9% exiting the March quarter.

While active ownership is still up 50 bps Y/Y, this is the largest sequential decline since 2013. Apple’s S&P 500 weighting fell 96 bps Q/Q, the largest sequential decrease since as far back as we have data (2009).

As a result, the spread between Apple’s S&P 500 weighting and institutional ownership contracted 38 bps Q/Q to 0.86%, implying that while investors are still underweight Apple shares, this gap has narrowed by ~30% since 4Q20.

In plain English, there was a 0.6% fall in the value of shares held by big investors, and while this sounds small, it’s pretty significant.

The note suggests there are two reasons for this cautious view of AAPL’s prospects.

Skepticism that Apple can show robust growth as it enters a period of tough competition, and the rotation from growth to value.

The “growth to value” part refers to two different reasons for investing in a stock. Growth investors, as the name suggests, look for companies they think are likely to experience specific market growth. Value investors, in contrast, look for stocks which they think are currently undervalued – where the company may not experience substantial growth, but the market will realise the stock is undervalued given other factors such as ability to maintain premium pricing in a market dominated by low-margin sales.

Morgan Stanley analyst Katy Huberty admits that the stock is 26% lower than her predictions for today, but says there is still plenty of reason for optimism – including four key tech trends.

  1. The growing adoption of 5G technology,
  2. Continued work, learn and play from home demand,
  3. The proliferation of wearable devices, and
  4. Increasing penetration and monetization of digital content and services.

Plus some Apple-specific factors.

Expanded financing, installment and trade-in programs are accelerating demand outside of Apple’s top 5 markets and driving existing users to upgrade to higher ASP products.

In our view, these factors, combined with 300 bps of gross margin expansion, 470 bps of operating margin expansion, and over $80B of stock buybacks, will drive 29% revenue growth and 57% EPS growth in FY21.

Longer-term, accelerating device installed base growth, faster Services monetization, and expansion into new and adjacent markets support our view that Apple’s ecosystem of products and services will sustain 10%+ annual revenue growth over the next 5 years.

Huberty believes AAPL will hit $161 within 12 months, against Friday’s closing price of $126.

Apple reported record earnings for the opening quarter of the year, but said the pandemic still leaves things too uncertain to offer any guidance for the current quarter.

Photo: Nicholas Cappello/Unsplash

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