Apple and a bearish analyst compete for a free trial of Apple TV +

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Apple and Wall Street have made good friends over the years. The company went public on December 12, 1980, and the initial offering created more millionaires than any IPO in US history. The company has always been covered by a large number of brokerage analysts and Apple has normally kept its distance from forecasts and estimates produced by them. But Apple is now struggling with one of the street investment companies, Goldman Sachs.

According to Reuters, the skirmish began after Rodman of Goldman had discovered the accounting methods used by Apple for its Apple TV + video streaming service. To the extent that Apple grants a free year of Apple TV + to those who purchase a new model of iPhone 2019, the company will try it as a discounted service associated with the purchase of equipment. According to Hall, this will lead to lower gross profit margins and profits for the iPhone, as the cost of the trial is subtracted from iPhone revenues; these revenues will be added to the service unit, to which TV + belongs. Hall claims that this change in accounting, which is neither irregular nor illegal, will reduce earnings per share by 16% in the first quarter of FY2020. October to December, this is generally the most important quarter for Apple in terms of revenues and profits.

According to analyst Goldman Hall, Apple's accounting of the TV + free trial will have a "significant negative impact" on the results, which Apple denies

The analyst says that the accounting choice made by Apple will increase the revenue of its service unit, as we just pointed out. "In reality, Apple's accounting method transfers revenue from hardware to services, even if customers do not perceive themselves as TV + buyers." This is also important for Apple because its long-standing goal is to double the revenue of the service unit, which will grow from the $ 25 billion generated in 2016 to $ 50 billion next year. During its second fiscal quarter, the most recent published by Apple, the Services unit recorded a record $ 11.5 billion. The addition of Apple Arcade and TV + could enable the company to achieve its $ 50 billion service revenue goal next year.

Because Hall thinks that Apple TV +'s one-year free trial will have a "significant negative impact" on profits, the analyst has reduced its target price to 12 months on the $ 165 compared to its previous goal of $ 187. The brokerage firm expects a decline in shares, which closed Friday at $ 218.75 after a decline of nearly 2% following the release of Goldman's research report.

But Apple stepped in to challenge Hall's analysis. In a statement, Apple said: "We do not expect that the introduction of Apple TV +, including the accounting treatment of the service, will have a significant impact on our financial results." Not only is it unusual for Apple to respond to a single brokerage report, but it turns out that Goldman is also Apple's partner for the recently launched Apple Card. In addition, the investment company also received good commissions by advising Apple on its $ 1 billion purchase of Intel's smartphone modem chip business in July. And in the past decade, no securities company has issued more publicly traded debt securities for Apple, which has allowed the company to borrow $ 44 billion in capital markets.

A so-called Chinese wall in investment firms is supposed to separate the research group from the investment banking unit generating commissions. This wall prevents Wall Street companies from publishing too many bullish reports on a company in the hope that this company will get underwriting contracts. But in this case, the wall worked as it should; The Goldman analyst has released a bearish report on Apple that has destroyed the value of the technology giant. Yet, there would be nothing illegal if Apple decided to hand over its next underwriting mission to Morgan Stanley or the Merrill Lynch unit of Bank of America because of this disagreement.

For those who do not buy a new iPhone, Apple TV + will cost $ 4.99 per month (with access for up to six people) after a free trial of a month. The service starts on November 1st.

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