Does The Apple Rally Have Legs?

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Apple (NASDAQ:AAPL) stock gained over 11% last week, marking its strongest weekly rally in close to five years, amid a possibility that the iPhone 7 upgrade cycle could pan out to be stronger than expected. Supply for the new smartphones has been short, with most models witnessing 2 to 3 week shipping lead times, and initial demand is apparently skewed toward the pricier, higher-margin 7 Plus device. Below we take a look at some of the reasons for the run up of Apple’s stock price and what lies ahead.

Trefis has a $120 price estimate for Apple, which is slightly ahead of the current market price.

See our complete analysis for Apple here

Samsung’s Woes, Carrier Promotions Likely A Big Demand Driver This Year 

Although strong iPhone 7 demand is partly attributable to features such as water resistance and improved cameras, there have been two major external factors involved as well. Apple’s key rival, Samsung, had to announce a recall for its recently launched flagship Galaxy Note 7 due to concerns over exploding batteries. The Korean giant’s struggles are a boon for Apple, given that popular Samsung devices such as the S7 Edge were at least partly responsible for the lackluster performance of Apple’s most recent flagship iPhone 6S. Samsung has drawn a lot of flak over its mismanagement of the recall process, and it is possible that the bad press surrounding the company will provide Apple with a window to capture potential Samsung customers. 

Additionally, carrier promotions for the new iPhones are among the best we have seen in the device’s nine year history. The big four U.S. carriers have offered  limited-time deals that essentially allow iPhone 6 and 6S users to trade up to the iPhone 7 for free (related: This Year’s iPhone Promos Are Great For Customers, Costly For Wireless Carriers). The uptake for these offers appears to have been strong, with both Sprint and T-Mobile indicating that the iPhone 7 was the most successful smartphone that they had ever launched. Interestingly, Chinese carriers have also been aggressive with iPhone promos this year, as they look to get more customers onto their 4G networks. China Unicom , China’s second largest carrier, is subsidizing 49% of an iPhone 7’s cost while China Telecom is subsidizing about 40%.

Apple Has Some More Room To Run, But Investors May Wait For Proof Points

We continue to believe that Apple remains undervalued, trading at a multiple of about 13x FY’17 earnings, compared to about 18x for the broader S&P and about 20x for the Nasdaq. The positive news cycle surrounding the iPhone 7 should prove comfort for Apple investors, given that the device was just viewed as a bridge for next year’s completely redesigned 10th anniversary iPhone. The potential outperformance of the iPhone 7 should have a positive impact on Apple’s earnings for the coming fiscal year (FY’17). Moreover, we expect fiscal 2018 to be an exciting year on the iPhone front, as the 10th anniversary device could set off an upgrade super-cycle of sorts.

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That said, investors may be waiting for some more proof points. Apple has been reluctant to divulge initial sales figures for the iPhone 7, and its Q4 FY’16 results are also unlikely to be an indicator of the device’s potential, given that it was launched towards the end of the quarter (2 weeks of sales). However, we should get a concrete picture of how the device is faring by looking at iPhone sell-through, ASPs and gross margins over the holiday quarter.

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