Apple Stock: One Bear Throws In The Towel

One of the few Apple bears on Wall Street was clearly caught off guard by the company’s mind-blowing fiscal Q2 results. Here is why Goldman Sachs lifted its sell rating on Apple stock.
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The iPhone maker dropped the mic on April 28, when it released fiscal second quarter results – even if Apple stock failed to lift off, as I believed it would. The beat over consensus was so wide that one long-time Wall Street bear decided to call it quits.

Goldman Sachs, one of a couple research shops that had an underperform rating on Apple stock, upgraded its position on the shares of the Cupertino company. Below is a recap of the old bear case, followed by what has fundamentally changed analyst Rod Hall’s mind about Apple.

Apple Park

Figure 1: Apple Park in Cupertino, California.

The old bear case on Apple stock

Goldman Sachs had a view on Apple that many bulls may disagree with, but that I believed might have some merit. I could identify three key points supporting the bank’s sell rating:

  • The iPhone 12 and 5G cycles appeared to be overhyped. Goldman called it a “redesign”, rather than a super cycle. Rod Hall believed that iPhone replacement rates would be low in 2021, and that ASP (average selling price) would pull back as stranded consumers favor cheaper models.
  • The end of the COVID-19 crisis would trigger a discretionary spending shift from tech devices, especially iPhones and Macs, to away-from-home services (travel and leisure).
  • Some of Apple stock’s recent price support seemed to have come from Apple Car speculations. Goldman saw less of an opportunity in the automotive industry, noting that margins tend to be much lower, and that the impact to Apple’s bottom line would be minimal.

The new “neutral” case on Apple stock

Make no mistake, Goldman Sachs is still not bullish on Apple. Rod Hall has reset his price target on Apple, from his old (and I would call unrealistic) $83 to the current $130 per share. At the analyst’s current price target, Apple stock would have about 3% of downside risk.

But clearly, fiscal second quarter proved the research shop wrong on at least the first bullet point above. Everything that Goldman’s analyst believed in, regarding the iPhone, was contradicted by record-breaking segment sales growth of 66%, with strength in every single geographic segment.

Fiscal 2Q21 Rev. growth by major/geo segment.

Figure 2: Fiscal 2Q21 Rev. growth by geo/major segment.

To make matters worse for bears, the performance of the iPhone was primarily driven by the higher-end models: the Pro and Pro Max. As a result, ASP likely moved much higher year-over-year (Apple no longer discloses this metric), which helped to lift gross margin by an astonishing 4 percentage points, to 42.5%.

A word from the Apple Maven

The Goldman bear has thrown in the towel. However, I continue to find bullet points 2 and 3 above relevant, and worth keeping in mind. I am particularly curious to see what will happen to Mac and iPad sales, once the pandemic is finally put to rest.

To be certain, COVID-19 is far from being under control in most corners of the world. Stay-at-home tailwinds will likely persist for a bit longer. But in the US, which I think represents roughly 35% to 40% of total company revenues, the reopening of the economy seems to be on track for summer 2021.

It is the skepticism about what Apple might need to do to maintain growth levels high into fiscal 2022 that may justify Apple stock not having skyrocketed immediately after blowout earnings.

Twitter speaks

Goldman Sachs was clearly caught off guard by Apple’s results. How about you? Were the results impressive, in line, or underwhelming? Check out the Twitter poll below.

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(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting The Apple Maven)