By Michael Marcus
It wasn’t so long ago that Apple (AAPL) became the first publicly traded company to reach $1 trillion in total market cap. The tech giant was trading at more than $220 per share last summer, peaking at $230 on October 3, 2018. With its iPhones, iPads, Macs, and Macbooks all holding solid niches in their respective segments, it looked like the sky was the limit for Apple.
We know how that turned out. Apple, along with the other FAANG stocks, took a heavy hit when the markets turned south. The details of the downturn are beyond the scope of this article, but for Apple the main issues were US-China trade tensions with potential supply chain disruptions and import/export tariffs, slowing iPhone sales as the smartphone market matures, and lower revenues from the China market as that country experiences a general economic slowdown with reduced consumer spending. Apple management’s decision to stop reporting quarterly iPhone unit sales did not inspire confidence, nor did the company’s reduced guidance before the Q1 FY19 earnings report.
But you can never count Apple out. With a year-to-date gain of 18%, outperforming the NASDAQ’s own impressive 15%, Apple is one of the stocks that is powering the equity turnaround that has defined the markets so far in 2019.
How Far has Apple Come?
The extent of Apple’s rebound depends on where you start looking. The main market indexes hit bottom on Christmas Eve; Apple closed at $146 that day. On the first trading day of 2019, January 2, shares in AAPL were up to $157, but company CEO Tim Cook issued a shareholder letter the next day in which he talked down the company’s Q1 guidance. AAPL slipped to $141 on January 3.
So, counting from the first day of trading this year we find Apple is up 18%, but counting from its lowest point on January 3, the stock has gained 32%. Shares currently trade for $186, almost exactly mid-way between last summer’s peak and January’s lowest price. It’s a dramatic reversal for Apple, and puts the stock at a four-month high point.
In recent months, Wall Street’s analysts have been evenly split on Apple, giving the company roughly equal numbers of buy and hold ratings. That pattern has been shifting lately, as analysts take a more bullish stance on Apple in light of the maturation of the smartphone market and the stabilization of device replacement cycles. Between March 11 and March 18, Apple has received 10 new ratings, including 6 buys and 4 holds. The buys include three with price target above $200 and a fourth at $197, as well as one analyst who has upgraded the stock and another who has initiated coverage with a buy recommendation. Let’s see what they have to say about Apple.
Plenty of Reasons to Love Apple
Writing from Morgan Stanley, Kathryn Huberty outlines her reasons for a bull position on Apple.
First, she points out that Apple gained smartphone market share in China during January and February, despite weakness in the overall Chinese smartphone market;
Second, she notes that February’s iPhone build estimate is the first in six months that has not been revised down;
Third, while Apple’s guidance for Q2 did not assume improvements to overall iPhone sales in February and March, the installed base is trending upwards;
And finally, Huberty points out that the replacement cycle for iPhone devices is converging with PCs faster than expected is likely to stabilize before the end of this year.
Her four points together indicate a strong position for Apple within a smartphone market that is reaching maturity. Apple’s large and loyal customer base, along with a steady replacement cycle for iPhone devices, suggest a firm foundation for the company moving forward. Huberty summarizes the situation: “Combined with stabilizing iPhone supply chain data points, we now see an upward bias to our iPhone estimates in the March quarter.”
Despite her bullish stance, Huberty offers a relatively modest price target on AAPL stock. At $197, however, her target does imply an upside of nearly 6%. (To watch Huberty’s track record, click here)
A Steady-State for iPhone Replacement
At the same time that Huberty was outlining her bull case for Apple, Cowen’s Krish Sankar was initiating coverage with a buy rating. Sankar crunches numbers on Apple’s iPhone business, noting that the company as a loyal customer base 900 million strong and that the oldest devices in service are approaching five years of age. He says, “With the iPhone installed base at 900 million units and oldest devices approaching five years, we believe annual iPhone shipments are running near replacement demand.” He sees annual iPhone shipments of 180 million devices, or 20% of the installed base, as “potentially a supportive LT annuity for device sales.”
Sankar’s view of the iPhone future suggests a stable cash flow for Apple on a five-year time horizon – an excellent position for any company. He suggests that AAPL is a stock with the safety of a bond (“Does the iPhone business make Apple a trading stock or bond coupon? We think it’s a bit of both,” in his words.), and sees an aggressive upside potential of 18% with a price target of $220. (To watch Sankar’s track record, click here)
Profits and Services on Track for Growth
And on March 11, Wamsi Mohan from Merrill Lynch upgraded his stance on AAPL, giving the stock a buy rating with a $210 price target. Mohan points out that gross profits in dollars are reversing from declines and will achieve growth in the second half of 2019. He also sees acceleration in the growth of Apple Services and wearables, and agrees that Apples installed user base will support up to 200 million units per year in annual iPhone deliveries. Finally, he sees the company’s free cash flow – always a strength for Apple – as an unequivocal good. Mohan’s price target suggests a solid 13% upside potential for AAPL.
Overall, Apple holds a Moderate Buy rating from the analyst consensus. Based on a summary of the best performing analysts, the Moderate Buy is derived from 17 buy ratings and 13 holds. AAPL’s share price stands at $186, which is $7 higher than the average price target of $179. But as the analyst reviews above show, that price target is due for a turnaround. (To watch Mohan’s track record, click here)
A Word from Warren Buffett
It’s hard to talk about Apple stock without mentioning Warren Buffett. The guru of trading has long been a fan of the computer company, attracted by the stock’s share price return and regular dividend payouts. In fact, he likes AAPL so much that the stock makes up more than 21% of the Berkshire Hathaway’s equity portfolio – its single largest holding. Buffett owns almost 250 million shares worth over $46 billion.
Like the analysts, Buffett bases his bull stance on the success of the iPhone; unlike them, he does not crunch the numbers. He said last summer, “I do not focus on the sales in the next quarter or the next year I focus on the … hundreds, hundreds, hundreds [of] millions of people who practically live their lives by [the iPhone].”
Regarding his heavy stake in Apple, Buffett has gone on record saying, “I don’t see myself selling.” He added, however, that he doesn’t plan to buy more at current prices: “If it were cheaper, we’d be buying it. We aren’t buying it here.”
It looks like Apple may be getting too rich for Mr. Buffett. He made those comments back in February; in the three weeks since then, AAPL has gained $12 per share – right in line with the analysts we’ve highlighted, who see the stock on an upward trajectory.
Since 2006, Apple has been an engine for growth and profits in the stock markets. That engine stalled last year, but if recent months are any indicator, it is revving up again. While new sales may be slowing for the iPhones, the smartphone market may be entering a replacement cycle/recurrent customer phase in which Apple 900-million strong installed user base will be a serious advantage. Company moves toward the Services sector provide an additional income stream, while AAPL’s reliable dividend adds to its appeal as an investment instrument.