Apple App Store Sales Are Dropping, But Here's Why Morgan Stanley Remains Bullish

Apple Inc (NASDAQ: AAPL) shares have taken a beating in the past couple of days after Bank of America downgraded the stock last week. On Monday, Morgan Stanley analyst Erik Woodring said the latest monthly App Store revenue data isn't exactly the good news Apple investors were hoping for.

The Numbers: App Store revenue dropped 5% year-over-year in September, according to Sensor Tower. For the full third quarter, App Store revenue was down 2% year-over-year.

Related Link: Why Apple Shares Are Sliding Today

Why It's Important: Woodring said slowing growth in the U.S. and China coupled with persistent weakness in China has dragged down App Store sales in recent months. He said the soft App Store sales will weigh on Apple's overall Services segment growth, which he is now projecting will be up just 8% in the third quarter compared to consensus estimates of 11%.

"We believe the recent App Store results make clear that the global consumer has somewhat de-emphasized App Store spending in the near-term as discretionary income is reallocated to areas of pent-up demand," Woodring said.

Related Link: Apple Launches iPhone 14, High-End Apple Watch, Emergency Satellite Capabilities And More: What Investors Need To Know

Woodring said he wouldn't be surprised to see App Store sales growth improve in the fourth quarter given there will be an extra selling week on the calendar, but the debate over the longer-term trajectory of App Store growth will likely continue for some time.

Bank of America downgraded Apple from Buy to Neutral last Thursday, triggering a sharp sell-off in tech stocks. In the downgrade note, BofA analyst Wamsi Mohan said he expects "weaker consumer demand" will prompt analysts to cut their Apple earnings estimates in coming quarters.

While a decline in App Store sales is certainly worth monitoring for Apple investors, Woodring remains bullish on Apple. Morgan Stanley has an Overweight rating and a $180 price target for the stock.

Benzinga's Take: Apple is certainly not the growth stock it once was, but it remains one of the biggest and best cash cow blue chip investments in the world. Apple shares trade at just 21.3 times forward earnings, and the company reported $19.4 billion in net income in the most recent quarter.

Photo: DenPhotos via Shutterstock