Morgan Stanley just downgraded Apple — and it echoes a growing complaint among analysts (AAPL)

Morgan Stanley has cut its price target for Apple stock to $200 from $203.
One reason cited is "weak China data."
Several notes in recent weeks have highlighted Apple's problems in China.
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Morgan Stanley has downgraded Apple over concerns that iPhone demand in China is soft and could lead to a weak June quarter.

Morgan Stanley cut its price target for Apple to $200 from $203 in a note distributed to investors on Friday.

Katy Huberty, the Morgan Stanley analyst, cited "weak China data" as a primary reason for the changing outlook.

"We believe the June quarter consensus iPhone shipment estimate of 42.9M could be revised meaningfully lower to account for weak supply chain data points and continued weakness in China data," Huberty wrote.

"Additionally, China smartphone activation data points to a reversal in Apple share trajectory with losses through March that presents a meaningful headwind in the largest smartphone market," the note continued.

The bottom line: Morgan Stanley updated its model to slash its predicted number of iPhone sales by 1 million in the March quarter, which reports on May 1, and by 6 million in the June quarter.

Morgan Stanley's note is the third in two weeks to highlight a weakness of Apple's business in China, which is Apple's second-biggest market after North America.

"With Hong Kong shrunk and mainland China fairly flat, we no longer see China as a driver of significant iPhone growth," the UBS analyst Steven Milunovich wrote in a note on Monday.

And last week, the KGI Securities analyst Ming-Chi Kuo wrote that Chinese smartphone makers had caught up to Apple's augmented-reality technology, which the company had heavily invested in, in less than a year.

Silver linings

Huberty and her team still see two primary reasons to stay relatively bullish on Apple stock.

First, Apple is finding a way to make more money from iPhone customers by selling them services like apps and Apple Music. "As more durable, higher margin Services become the central driver of growth, we see room for further re-rating of AAPL shares," she wrote.

Second, Apple is likely to announce a large capital-return program on May 1, as it does every year. But it could be larger than normal this year because of the new US tax law.

"We expect Apple to announce a $150B increase to its total capital return program," Huberty wrote.

"As a result, we believe Apple will accelerate repurchases to an annual rate of $80B in FY18-FY19, from the $30B current annual run rate,and could raise the quarterly dividend by 50% this year, to $0.945/share, before reverting back to 10% annual dividend increases in the years to follow," she continued.

Basically, Apple could buy back $210 billion in shares and pay $52 billion in dividends. Good news for Apple investors, even if iPhone sales do flatten out in China.

Morgan Stanley just downgraded Apple — and it echoes a growing complaint among analysts (AAPL)

Silver linings

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