With Apple’s quarterly results due in less than a week, analysts continue to jockey for position ahead of what will be one of the most closely scrutinized disclosures of the current reporting season.
A flurry of Wall Street research notes Friday morning illustrate both the general enthusiasm for Apple’s (ticker: AAPL) prospects, and some growing concerns about valuation. The shares continue to march relentlessly higher, driven by enthusiasm about the iPhone 11 and AirPod sales, the growth of the services business, and the debut later this year of the first generation of 5G iPhones.
After an 86% move in 2019, the stock has already appreciated almost 10% this year, increasing the company’s valuation in just the first few weeks of 2020 by about $125 billion. That is roughly the market capitalization of IBM.
Not everyone is worried about valuation. For instance, Wedbush analyst Dan Ives pounded the table on Apple shares, lifting his target price to $400, the highest on the Street, from $350. He expects Apple to handily beat investors’ expectations for the December quarter “in light of a strong holiday season with pent up demand catalyzing iPhone 11 purchases across the board.” He contends Wall Street is underestimating the magnitude of the coming 5G upgrade cycle.
The results for the December quarter are scheduled to be released after the close of trading on Tuesday.
“Our recent Asia checks around iPhone 11 units look robust and coupled with jaw dropping AirPods momentum should lead to clear upside in the upcoming results with strong March guidance also likely on the horizon,” Ivers wrote. “While the stock has had a massive rally over the past year and thus far in 2020, we continue to believe this is a must own stock into what we would characterize as a transformational 5G supercycle over the next 12 to 18 months with Apple being our favorite 5G play.”
Ives noted that many investors are asking whether all the good news is reflected in the stock price. “The answer from our vantage point is a resounding NO,” he wrote, repeating his view that Apple has potential to be the first company with a $2 trillion valuation “given the 5G tailwinds and services momentum potential over the coming years.
And then there is Rosenblatt Securities analyst Jun Zhang, who is one of the few Apple bears. He lifted his target price to $250 from $150, but maintains a Sell rating on the stock. Zhang thinks expectations for the 5G phone cycle are too high, and that average prices could be lower than expected, given that consumers appear to prefer the entry-level version of iPhone 11.
Bernstein analyst Toni Sacconaghi, who maintains a Market Perform rating and $300 target price on Apple, split the difference between the two. He is torn about the stock.
“On one hand, it has more than doubled over the last year and its valuation is at its highest level since 2010, when the company was growing at 50% per year,” Sacconaghi wrote in a research note. “On the other hand, our analysis indicates that Apple outperforms 65%-80% of the time when revenue revisions are positive—which we think is likely.”
Sacconaghi says revenue forecasts for the current fiscal year are too low, in particular for AirPods. He says Apple is likely to forecast March quarter revenues of $63 billion to $65 billion, above the Wall Street consensus expectation of $62 billion. He thinks Apple can reach $16 a share in earnings in fiscal 2021 on the strength of the 5G phone cycle, while the Street view is that profits will be $15.
The Bernstein analyst says he thinks Apple shares could “continue to grind up,” but that the balance between risks and potential rewards from owning the stock looks balanced given its high valuation.
KeyBanc Capital Markets analyst Andy Hargreaves, who has a Sector Weight rating on the stock, has similar concerns. “There is a perception of relative safety in Apple [shares] and we expect near-term results to be very good relative to consensus estimates,” he wrote. “However, the valuation appears to require a sustained re-acceleration in top-line growth that we do not anticipate, while leaving little room for error. We believe this limits the potential for further multiple expansion, while exposing investors to risks associated with iPhone [average selling price] declines, stagnating user growth, brand risk in China, and regulatory risk around App Store.”
Apple shares rose as high as $323.33 on Friday, a record high, before slipping back to $321.15, for a 0.6% gain, by early afternoon.
Write to Eric J. Savitz at eric.savitz@barrons.com
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Apple’s Stock Keeps Setting Records. Some Analysts Are Nervous. - Barron's
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