Late on December 1, Wedbush’s Dan Ives tweeted his revised price target on Apple stock (AAPL) - Get Free Report: $200 apiece. At these levels, shares of the Cupertino company would be worth over $3.2 trillion within the next 12 months — a new Street-high target.
The Apple Maven talks about how AAPL might get to those levels. Could investors be in for a nice bull run that pushes Apple stock 20% higher from here?
(Read more from the Apple Maven: Apple Stock To The Moon? The Impressive Late November Run)
iPhone at the core of the bull case
According to Dan Ives’ tweet, the key drivers that could send AAPL past the $3.2 trillion valuation are the same that supported the analyst’s recently discussed bull thesis. The iPhone 13 cycle is shaping up to be at least as strong as Wedbush itself predicted, and better than most analysts anticipated.
About a week ago, I discussed how Wall Street has slowly warmed up to the idea that tough comps and supply chain bottlenecks might not be enough to spoil Apple’s holiday quarter. Based on Dan Ives’ unit shipment projections of 40 million iPhones between Black Friday and Christmas, I estimate that segment revenues in fiscal Q1 could rise by 10% this year.
What it would take
Currently, analysts expect Apple to deliver fiscal 2022 EPS of $5.70, suggesting that the stock trades at a current-year P/E of 29 times. Make no mistake, this is a rich multiple. But by the end of next year, investors should start to value Apple stock on a multiple of 2023 earnings, or 27 times.
To count on valuation expansion, in this case, might be a bit of a stretch. Now seems to be a perfect-storm scenario for Apple: low interest rates, successful product cycles (iPhone, Mac, iPad and beyond), defensive play against COVID-19 fears, etc.
But that does not mean that Apple cannot deliver above-expectation financial results, thus pushing the stock price higher. I think this is even more likely if the Cupertino company announces its mixed reality devices in the second half of fiscal 2022, as some believe to be the case.
(Read more from the Apple Maven: Apple Stock: Immune To Omicron Fears)
One step back first?
I do have a problem, however, with the idea that Apple stock might shoot straight up from $166 per share to $200 in the next year.
As I discussed earlier today, AAPL has outperformed the S&P 500 (SPY) - Get Free Report since mid-November by the most in over a year. While some may think that the recent rally is justifiable, history suggests that a near-term pullback relative to the broad market is certainly not out of question.
Based on my research, the average excess return (i.e. above the S&P 500) of holding AAPL over any three-week period in the past five years has been +1.3%. However, this number dips to -0.5% when AAPL has outperformed SPY by more than 10 percentage points in the previous three weeks.
In plain English, Apple stock has historically underperformed the S&P 500 in the short term if and once it outperforms the benchmark by a wide margin in the recent past. This is precisely the current setup.
I am not necessarily a skeptic on the $200 price target for 2022. However, for the reason presented above, I think that AAPL could take a step back first, at least relative to the broad market, before heading higher by the end of next year.
A new Street-high price target has been offered on Apple shares: $200. How long do you think it will take for AAPL to climb 20% and reach the $3.2 trillion market cap implied by this price target?
Is the price right?
Looking at a company’s business fundamentals is only half the work needed to find a good stock. How much one pays to own the shares is a key factor in the success of any investment. This is why valuation analysis is so important.
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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)