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How Apple Stock Could Sink 21%: Analyst Report

Most on Wall Street believe that Apple stock is a buy, but one lone bear sees the share price dipping another 21% from here. Here is how it could happen.

Nearly all analysts on Wall Street believe that owning Apple stock  (AAPL) - Get Apple Inc. Report is a good idea. But one bearish expert stands out from the crowd – we have talked about ItauBBA’s Thiago Kapulskis and his underperform thesis on AAPL recently.

The analyst, in fact, thinks that Apple shares could decline 21% from current levels to $122. Today, I review how this could happen, in his opinion, and why the ItauBBA team of researchers cut its price target on AAPL following the announcement of the iPhone 14.

Figure 1: How Apple Stock Could Sink 21%: Analyst Report

Figure 1: How Apple Stock Could Sink 21%: Analyst Report

(Read more from Apple Maven: Apple’s iPhone 14 Launch: The Biggest Surprise For Investors)

AAPL: the core of the bear thesis

Upon launching his coverage of Apple, Mr. Kapulskis supported his bearish stance towards the company’s stock based on the following key factors:

  • The end of monetary easing should introduce to the economy “significant headwinds in the next few quarters”.
  • “Innovation has been more incremental than disruptive since Steve Job’s death”. Thiago believes that the company’s growth opportunities could be more limited to price hikes and upsell moves.
  • Apple’s P/E is richer than Microsoft’s  (MSFT) - Get Microsoft Corporation Report and those of many SaaS companies, which could be unsustainable.

iPhone 14: a negative catalyst?

On September 7, Apple launched the iPhone 14 and a couple other product updates, including a new Watch and AirPods Pro. Most analysts saw the event as a positive for Apple stock, especially after some of them saw that demand for the new smartphone has been quite strong out of the gates.

ItauBBA sees things a bit differently. The analyst and his team noted that Apple refrained from raising the price of the iPhone Pro and Pro Max, when most experts expected the company to do so by $100. Last week, I talked about the negative implications of maintaining prices unchanged during a period of rising producer and consumer prices.

Mr. Kapulskis thinks that lack of a price bump “is evidence that demand is weakening, particularly in developed regions”. Should he be right, Apple could be hit twice: (1) lower volume sold (2) at a price that is relatively reduced YOY, in inflation-adjusted terms.

The ItauBBA team quantified the impact of flat prices and rising COGS on Apple’s gross margin. In a nutshell, product margins could contract by 220 bps YOY in a base case scenario, which in turn has led Thiago to lower his EPS estimate by 11%.

The Apple Maven’s take

Apple stock is currently down 15% from the early January peak. Should the share price dip to $122, as Mr. Kapulskis believes will be the case, the drawdown would reach 33%.

Such a dip would be, to an extent, “business as usual” for AAPL. The chart below shows that Apple has corrected this much (and beyond) about five times since the start of the century. Therefore, history suggests that a large correction ahead is certainly possible.

Figure 2: AAPL's drawdowns since 2000.

Figure 2: AAPL's drawdowns since 2000.

For such a decline to happen, I believe that the whole stock market would need to turn sour. AAPL represents about 7% of the S&P 500, and it is hard to imagine the share price sinking another 20%-plus without the entire equities index doing so as well.

So, to me, the macroeconomic risks associated with lingering inflation, rising interest rates and deteriorating consumer sentiment are the most relevant. In a worst case scenario, the iPhone 14 cycle probably means less to AAPL than the health of the global economies at large.

Still, I continue to find AAPL a good stock to own. While valuations are not cheap, I think that the Cupertino company has repeatedly proven that it can execute very well in a number of environments, in part due to the appeal of the Apple brand that seems to be at a high – and that I think will continue to support demand for Apple’s products and services even if discretionary spending in general takes a hit.

Because quality matters most during distressed times in the markets, I remain an AAPL bull.

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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)