Apple Stock At $340: Two Key Risks And A Trigger

by Trefis Team
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Apple stock (NASDAQ:AAPL) lost more than 25% – dropping from $300 at the beginning of the year to below $225 in late March, due to the coronavirus outbreak, but has soared by close to 50% since then to about $336 currently. The recovery is driven by the multi-billion-dollar Fed stimulus and the fact that Apple is viewed as somewhat of a safe haven during times of uncertainty. The stock is now 11% higher than where it started this year.

Trefis estimates Apple’s valuation to be around $340 per share – which is roughly in line with the current market price. Below, we outline two key risks and one potential trigger for Apple’s stock.

Apple’s revenues could face some pressure in the near-term, as customers scale back on discretionary spending with unemployment remaining high and the economy entering what looks like a deep recession. We see iPhone sales falling from $140 billion in FY’19 to about $132 billion in FY’20, as there’s less reason for customers to upgrade to smartphones with the latest cameras and wireless standards as they spend more time at home in the midst of a pandemic. Sure, the declines will be partially mitigated by higher services sales, which we expect to grow from $46 billion to $55 billion, but Apple’s overall revenues are likely to remain roughly flat this year at about $263 billion.

Apple’s expanding valuation multiple is also a concern, although it is partly justified by declining interest rates. Apple’s P/E, based on current market price and our projected 2020 EPS of $12.80 stands at about 27x, up from levels of 18x over the last 2 years, despite posting limited growth. Although Apple stock offers much better yields than keeping your money in a bank (you’d need to deposit roughly $1,000 into a bank to earn $12.80 each year, versus just $350 to buy Apple stock), there may be better opportunities in the tech sector. For example, Google’s parent Alphabet trades at just about 26x trailing earnings, despite posting 4x Apple’s revenue growth over the last 3 years.

While Apple’s margins should largely hold up at levels of 21% in FY’20, the company could see an opportunity to expand margins going forward, driven by a larger mix of high-margin services sales. Apple’s services gross margins stand at 64%, vs. about 32% for hardware. Higher than expected growth in service sales through the current pandemic and after, could prove accretive to Apple’s margins. Separately, the increasing focus on in-house components could also help cut Apple’s expenses. For instance, the company is likely to transition its Mac computers away from Intel processors to Apple-designed ARM chips, with the first Apple-powered Macs launching as soon as this month. [1]

Apple’s suppliers have gained far less than Apple since the markets began their recovery in late March. Do they warrant a look? Find out more in our analysis Trefis Theme: Apple iPhone Component Suppliers

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Notes:
  1. Apple Plans to Announce Move to Its Own Mac Chips at WWDC, Bloomberg, June 2020 []
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