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One AAPL Bear Wonders: How Could I Be Wrong?

After presenting his bear case on Apple stock, one analyst played devil’s advocate and considered the risks to his underperform rating. Here are the highlights.

I have recently written a brief article about ItauBBA’s Thiago Kapulskis thesis on Apple stock  (AAPL) - Get Apple Inc. Report. He is the only sell-side analyst on my radar (and also according to TipRanks) who has a bearish rating of “underperform” on the shares of the Cupertino company.

Most recently, Thiago published a piece in which he plays devil’s advocate to his own convictions. What are the biggest risks to the bear thesis? I think it is always a good idea for bulls to consider the bear case and vice versa.

Below are some of the key points raised by the analyst, followed by my own takes on them.

Figure 1: One AAPL Bear Wonders: How Could I Be Wrong?

Figure 1: One AAPL Bear Wonders: How Could I Be Wrong?

(Read more from the Wall Street Memes: Is Apple Stock Overvalued? What The Peer Comparison Says)

Risk #1: the iPhone 14 cycle

According to the ItauBBA team, Apple’s next smartphone could be a catalyst for further share price appreciation. Very specifically, the analyst fears that the iPhone 14 could go to market at a higher selling price than last year’s model, something that could boost both revenues and gross margins.

Thiago and his team suspect that the new Pro and Pro Max trims could see a price bump of between 9% and 10% to $1,099 and $1,199 in the US, respectively. However, he points out that the negative impact that the price hikes could have on demand remains to be seen.

Lastly, Mr. Kapulskis observes that Apple stock generally rallies each year ahead of the iPhone launch, which this year has been scheduled to happen on September 7. In the month of August over the past 10 years, AAPL has gained an average of about 7%, and only produced a loss twice – in 2015 and 2019.

Risk #2: growth through M&A

The second risk to the bearish thesis mentioned by the analyst is M&A. In his view, Apple stock could react positively if Apple were to pursue inorganic growth through the acquisition of a company in the media and/or tech spaces.

Thiago thought big by wondering if Netflix (NFLX) or Electronic Arts (EA) could be the targets. He pointed out that, during the most recent earnings call, CEO Tim Cook kept the door open to M&A activity, even large deals:

“We never buy just to buy or buy just for revenue purposes. But [...] we would buy something that is strategic for us. To date, we have concentrated on smaller IP and people acquisitions [...] but I wouldn’t rule anything out for the future.”

The Apple Maven’s take

Regarding the iPhone 14, I too would not be surprised to see higher ASP (average selling prices) across the portfolio. Whether through the COVID-19 crisis or during the challenging period that followed the thick of the pandemic, demand for the iPhone remained red hot.

Why not take advantage of Apple’s strong market position to raise prices on the popular device? This is even more likely in an environment of rising consumer prices. Because “inflation-proof stocks” are likely to catch a bid nowadays, a price increase announcement next month could be a bullish development.

If I were a bear, I would be less concerned about Thiago’s point regarding seasonality. The historical trend makes intuitive sense to me, but is never a guarantee. Also, any thesis that relies on month-by-month price behavior seems overly short-term focused, in my view.

Regarding Apple’s potential M&A activity, mega mergers have often been the subject of speculation. Back in 2017, one Wall Street team tossed around the idea of the Cupertino company acquiring Disney  (DIS) - Get The Walt Disney Company Report, the media powerhouse valued today at over $200 billion – about three times the size of Apple’s net cash position.

But Apple has historically never been a big-ticket M&A player. To date, the company’s largest acquisition (by far) has been Beats, purchased for a “meager” $3 billion in 2014 – see table below.

Figure 2: Apple's acquisitions.

Figure 2: Apple's acquisitions.

So, for starters, a mega deal would be quite atypical for Cook and company. Second, a deal may not necessarily please the markets, depending on acquisition costs and considering the macroeconomic risks ahead.

If anything, were I an Apple bear, I would be much more concerned about what the iPhone maker could launch from within to jumpstart growth over the next few years. Specifically, I am thinking (1) mixed reality hardware and serviceS in the next 12-18 months and (2) autonomous vehicles in the next 3-5 years.

I doubt that many analysts, if any at all, currently have these top-line growth opportunities fully factored into their model projections. If or once they do, Apple’s growth profile could improve substantially, posing what I believe to be sizable risk to the bearish case.

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