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Share price of Apple (NASDAQ:AAPL) came under pressure today when Goldman Sachs cut the target price for the stock from $187 to $165 while maintaining an overall neutral outlook. This translates into a 26 percent downward revision for the stock price target and came about due to the expected negative effects of the implied accounting method to be used by the company for Apple TV+ trial. Due to the publication of this prognosis by Goldman, Apple’s share price is down 2.25% at time of writing.

According to the Goldman analyst Rod Hall, Apple is likely to treat the 1-year free trial of Apple TV+ service bundled with the purchase of new Apple products as a $60 discount on the overall price of the bundle. This discount is then to be apportioned between the iPhone and the streaming service. The application of this theoretical discount effectively reduces the Average Selling Price (ASP) of the iPhone while the product cost remains the same, thereby, leading to margin compression. On the other hand, the streaming service revenue is likely to be treated as a ‘deferred revenue’ upfront and then recognized as ‘revenue’ for accounting purposes on a month-on-month basis over the 1-year period. Hall expects this accounting treatment of the theoretical discount to have a “material negative impact” on the earnings. Therefore, the analyst has predicted Apple’s Earnings per Share (EPS) to decline by 16 percent for the first fiscal quarter of 2020.

Previously, Rod Hall had noted that Apple priced the iPhone 11 at just shy of $700 which constitutes a $50 discount to the iPhone XR price. Moreover, as the company is offering dual camera system on lower priced iPhones, the combination of these two factors is likely to divert a greater proportion of sales volume away from the higher priced iPhone 11 Pro lineup. Given that these models earn higher margin for Apple, their sales volume decline may negatively impact the company’s overall earnings.

Apple has released three version of the iPhone (read our extensive coverage here) this September constituting the 11th annual iteration of the iconic smartphone. In addition, the company also introduced a streaming service called Apple TV+ which is expected to be launched on 1st November 2019 and is to be priced at $4.99. Furthermore, Apple unveiled a 10.2-inch iPad priced at $329 as well as a brand-new Apple Watch Series 5 with an always-on display.

It's important to note that Apple is in the midst of attempting to pivot its revenues away from being an iconic hardware company and towards the more investor friendly "Services" aiming at recurring revenue rather than regular hardware sales. The stagnation of iPhone hardware sales in recent times led to Apple stopping breaking out the sales numbers explicitly in its earnings.

Update:

Apple has disputed the negative call by Goldman Sachs and has released the following statement:

"We do not expect the introduction of AppleTV+, including the accounting treatment for the service, to have a material impact on our financial results."