Apple stock at $175 or $83? Both paths explored
Wall Street analysts seem to agree, on average, that Apple stock is a strong buy. But around the consensus price target of $150 per share, estimates vary widely: from $83 at the bearish end to $175 at the bullish end of the spectrum.
- iPhone super cycle
Wedbush places the iPhone at the center of the investment thesis. The analyst believes fervently in the 5G super cycle, arguing that just about 40% of Apple’s smartphone installed base is currently overdue for an upgrade. Greater China, a struggling geographic segment for the past five years, represents a sizable rebounding opportunity.
- Apple Car, services and wearables opportunities
According to Wedbush’s Dan Ives, the EV (electric vehicle) market could reach $5 trillion over the next decade. Should Apple announce a production partner by the summer, as Wedbush believes will be the case, the Cupertino company could begin to capitalize on the opportunity soon.
Evercore ISI’s Amit Daryanani, on the other hand, dives deeper into another couple of high-growth businesses for Apple: services and wearables. The analyst sees “a clear path to $100 billion in services revenue by fiscal 2025 and $70 billion for wearables. The growth should help drive margin expansion and help smooth out the cyclical nature of the hardware business”.
- This ship is going down!
Despite plenty of Wall Street love, Apple stock also has its bears. None is more pessimistic about investing in the Cupertino company’s shares than Goldman Sachs’ Rod Hall, who believes that the stock has over 30% downside risk.
At the core of the analyst’s bearish thesis is the services segment. Rod argues that a post-pandemic world could be highly disruptive to service revenues, as consumers choose offscreen entertainment after nearly 18 months of being confined at home.
The bull is tamer at Morgan Stanley
Apple’s services business has caused a long-time, thoughtful bull to hesitate. Morgan Stanley’s Katy Huberty still thinks that Apple stock is a buy. However, she has lowered her price target on concerns over how richly services should be valued.
Ms. Huberty now believes that Apple shares can climb to $156, for a more modest 23% upside opportunity to mid-Tuesday price levels. This figure compares to nearly 40% gains for the most bullish analysts on Wall Street and Katy’s own 35%, as of roughly four weeks ago.
- Apple’s Services: better than expected
What is interesting about Morgan Stanley’s services-driven price target cut is that it comes alongside a positive read on the business itself. According to Seeking Alpha:
“Katy Huberty raises Apple's Services revenue estimates to account for accelerating Google traffic acquisition cost-related revenue growth and strong App Store revenue. The firm expects Services revenue growth to accelerate by 6 points to 22% year-over-year in FY21, up from the prior 19% year-over-year growth estimate.”
In plain English, the analyst believes that Apple’s service revenues will not only be better than Wall Street’s expectations in 2021 and 2022, but they will also beat her own prior estimates.
Why buy Apple stock now, before earnings season
Earnings season in the US unofficially begins a bit later this month. Apple stock has been climbing ahead of the Cupertino company’s reporting day, scheduled for April 28. Shares are now valued at roughly $128, which is 10% away from both the all-time high of late January and the 2021 low of March.
The Apple Maven has supported buying Apple stock at a price range of about $116 to around $120. Shares are now about 8% above those levels, reached only one month ago. Aspiring investors could be asking if they may have missed out on the opportunity.
- Will shares rally pre-earnings again?
Notice that, ahead of each earnings day highlighted, shares rallied in anticipation for the financial results. In my view, the alignment of bullish price action and the earnings calendar has not been a coincidence.
We now know that Apple has done superbly through the COVID-19 period. In fiscal 2020, revenues and earnings per share increased by 6% and 10%, respectively, beating the company’s 2019 performance. The numbers were impressive and surprising, given all the pandemic disruptions.
Microsoft stock to join Apple in $2 trillion club
Microsoft is now valued at $1.9 trillion, the highest that it has ever been. Very soon, another 5% of gains to be precise, shares of the Redmond-Washington tech giant could join Apple stock in the select group of US-based companies worth $2 trillion.
- What could send Microsoft beyond $2 trillion
Unlike Apple, for example, whose revenues come predominantly from the iPhone (about half of total sales), Microsoft’s P&L is much more diversified.
Roughly one-third of the tech giant’s top-line results is produced by each of its three main segments: business productivity, intelligent cloud and personal computing. Also, much of Microsoft’s revenues are recurring and somewhat predictable by nature – think subscriptions for cloud software and LinkedIn, etc.
The stability of Microsoft’s business model probably explains why the stock has been the least erratic within the FAAMG group. For this reason, it is unlikely that one big variable or event will propel Microsoft stock beyond the $2 trillion mark. Instead, what will do so is likely a combination of factors that should include:
- Secular shift to cloud solutions that should increase cloud infrastructure revenues and likely expand software margins;
- A change in work habits that favors the home office, a plus for business productivity offerings like cloud storage and Skype;
- The tablet-as-a-PC trend that favors Surface;
- The new video game console cycle that was recently kicked off with the long-awaited introduction of the Xbox Series X and S.
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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)