If you had bought Apple (AAPL) stock on the news, on Sept. 9, 2014, when it slumped to $96 a share following the company’s announcement of its much-awaited new products, you would have made a savvy and wise, opportunistic move. The stock has since rebounded to more than $102 and Apple aficionados predict it will continue to fly higher and hit new all-time highs.Last Tuesday was a big day for Apple when it finally launched several much-awaited new products – a 4.7-inch iPhone 6 and a larger 5.5-inch iPhone 6 Plus, the long anticipated Apple Watch, and a surprise payments system in Apple Pay. Wall Street hailed the new products and welcomed them as the groundwork for Apple’s re-energized innovative machine.
“Barring any execution missteps, the launch of two larger-screen iPhones, Apple Pay, and Apple Watch should put to rest any fears that Apple and its management team had misplaced their innovative mojo,” says Brian Colello, equity analyst at Morningstar. Predictably, most Street analysts promptly raised their earnings estimates on Apple and boosted their stock price targets. Apple has been a rarity on Wall Street for some time as no analyst from the major investment houses rates the stock a sell. Twenty-two analysts recommend Apple as a “strong buy” and five rate it as a “moderate buy.” Eight less enthusiastic analysts rate the stock a hold.
“We were impressed with the larger screen sizes, the breadth of the payments solution, and improvements on the Watch relative to competitors’ products,” says Ben A. Reitzes, analyst at Barclays Capital, who rates Apple’s stock as “outperform.” He raised his price target for the stock to $116 a share from $110. He figures the new products strike a fine balance of protecting margins while maintaining prices relatively close to levels consumers have been comfortable paying in the past.
As a result, Reitzes has increased his assumptions on Apple’s profitability for 2015, and predicts “a longer tailwind from this product cycle.”
The analyst points out that what Apple is trying to do is "laying the groundwork for several strong quarters." One could argue, says Reitzes, that the “timing of the new iPhones in September, with the Watch pushed out to 2015, could result in ‘smoother’ quarters with more consistent upside through June.”
The analyst says he won’t be surprised if Apple hosted another event in October to release new iPads and discuss advancements in Apple TV. So he raised his price target based on about 15 times his fiscal 2016 earnings estimate of $7.89 a share on projected revenues of $224.23 billion. For fiscal 2015, the analyst lifted his estimate to $7.20 a share from $7.10 based on revenues growing to $210.23 billion (vs. his earlier estimate of $206.76 billion). For 2014, Reitzes sees earnings of $6.29 a share on projected revenues of $180.23 billion, up from last year’s $5.68 a share on revenues of $170.91 billion.
A further upside case for the stock could be made, says Reitzes, where Apple’s stock could leap to $126 a share based on its prospects for “relative high organic growth, with open-ended potential to gain share in phones, tablets, and Macs.” So he is convinced the stock’s valuation is still relatively inexpensive, supported by a high net cash balance, among others. Kathy L. Huberty, analyst at Morgan Stanley, who rates Apple as “overweight,” notes that Apple’s stock still hasn’t priced in the upcoming hardware, software and services innovation. She expects Apple will see iPhone (market) share gains and growth reacceleration, driven by larger screen iPhones “based on our AlphaWise survey and supply-chain checks." Huberty also sees the Apple Watch and new services like Apple Pay helping to accelerate growth and expand margins.
The analyst describes the Apple Watch as an “important barometer of the company’s innovation capabilities under the leadership of Tim Cook.” And “we are also encouraged by recent additions to Apple’s management team which expand leadership in key areas like retail, design, health and digital context,” says Huberty. She adds that among the potential catalysts for further growth would include a hybrid iPad/MacBook Air product, (which is likely in 2015) or a smart TV launch possibly over the next two to three years.
So with the recent jump in Apple’s stock after the new-products announcement, the questionn being raised iw whether Apple’s price is nearing its peak levels. Far from it, according to close Apple watchers.
“We believe Apple’s current stock price creates an attractive entry point for investors to benefit from Apple’s ability to sustain revenue and earnings-per-share growth through fiscal 2015,” says Amit Daryanani, analyst at RBC Capital Markets. “We believe multiple catalysts remain as the company benefits from “iPhone 6 ramps, iPad refresh cycle, potential iTV launch or other major product lines, and improvements in capital allocation policy.”
The fundamental reality, the analyst argues, is that Apple’s current valuation is “materially sub-par to what we anticipate its long-term revenue and earnings potential is.” In the current environment, with Apple’s $164 billion in net cash, or $22 a share, “we believe the stock is undervalued at these levels.” And from a products perspective, “we believe the company can continue to gain share in both the tablet and smartphone space,” says Daryanani.
The analyst’s upside scenario envisions Apple penetrating the low-end smartphone arena, creating a new product line that sees significant long-term growth and penetrating gross margins at or above the 40% level. In that scenario, Darynanani says, the stock deserves a higher valuation as earnings growth expansion would likely outpace revenue growth over the next several years.
“In this scenario, we believe many investor fears would be quelled, causing the stock price to move well above our current target price (of $110 a share),” says the analyst.Much of what's behind the unrelenting popularity of Apple's stock is the continued wide support from both the individual investors and the large institutional investment houses. Among the large institutions that have large holdings are the Vanguard Group which owns a 5.39% stake, State Street with 4.03%, BlackRock Fund Advisors with 3.12%, and Fidelity Management with 3.04%.
