Apple Losing Its Bite With Big Whales? Why Institutional Investors Are Picking Different Tech Orchards

Zinger Key Points
  • The spread between active institutional ownership and S&P 500 weighting is the most negative for Apple, says Morgan Stanley.
  • The firm attributes this to mismatch between valuation and near-term fundamentals as well as Apple's rising weighting in the S&P 500 Index.

Apple Inc. AAPL, the world’s most valuable company, has not garnered significant favor among major institutional investors, according to an analysis presented by Morgan Stanley’s Erik Woodring in a note published on Wednesday. 

What Happened: In the second quarter, Apple’s weighting in institutional portfolios decreased by 26 basis points to 5.51%, as stated by Woodring. Despite this, the company’s S&P 500 weighting experienced a 65 basis point increase to 7.72% during the same quarter, resulting in a spread of 2.21% between S&P 500 weighting and active ownership, marking it as the most under-owned large tech entity. 

The numbers assume importance because the second quarter marked the largest single quarter increase in Apple under-ownership since Morgan Stanley began tracking the data, the analyst said.

Additionally, Apple’s current level of under-ownership has been unprecedented since 2008, surpassing Microsoft Corp. MSFT as the least-owned large-cap tech stock among institutional investors. 

Woodring suggests that concerns among investors regarding valuation versus short-term fundamentals may be contributing to this relatively low institutional ownership. 

He points out that Apple’s P/E valuation reached a peak of 29 times the earnings per share estimate for calendar year 2024 in July, despite fourth-quarter fiscal year guidance indicating a fourth consecutive quarter of year-over-year revenue decline. 

Woodring also speculates that the gradual increase in Apple’s weighting within the S&P 500 Index could have contributed to this predicament.

See Also: Everything You Need To Know About Apple Stock

How Apple Compares Vs. Microsoft

Active Institutional OwnershipQ-o-Q ChangeS&P 500 WeightingQ-o-Q ChangeSpread Between Active Ownership And S&P Weighting
Apple5.51%(-26 bps)7.72%+65 bps(-2.21%)
Microsoft4.6%+66 bps6.8%+78 bps(-2.17%)

Source: Morgan Stanley

Source: Morgan Stanley

Is Pessimism Justified?  Despite the pessimism among institutions, Woodring said he is encouraged by the fact that the September quarter growth is coming in the right places.

iPhone revenue is expected to inflect to year-over-year growth and the Services revenue will likely reaccelerate to low double-digit growth in the FQ4 and the fiscal year 2024, he added.

The company's gross margin tailwinds are still underappreciated by investors, the analyst said. He models a 5% upside to the Street earnings per share estimate for the fiscal year 2024.

Woodring expects the stock to outperform as growth accelerates, margins expand and consensus estimates move higher.

“Longer-term, we continue to believe the growth of Apple’s installed base and upward pressure on spend per user (potentially catalyzed by a shift to a subscription model) will drive the LTV of Apple’s installed base higher, which is captured in our $270 bull case valuation,” the analyst said.

In premarket trading, Apple stock rose 0.45% to $181.93, according to Benzinga Pro data.

Read Next: Apple Wants To Scale Up Manufacturing Parts For Its Devices In India And Fast

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Posted In: Analyst ColorEquitiesNewsTop StoriesTechTrading IdeasErik WoodringExpert IdeaMorgan Stanley
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