It is rare to read or hear from an Apple stock bear on Wall Street. When it happens, I like to pay close attention. I think it is important to understand the devil’s advocate case to investing in a company with such strong business fundamentals.
Following Apple’s Spring Loaded event, Wolfe Research analyst Jeff Kvaal published a note discussing his main takeaways. I was mostly interested not in his “hot takes” on the event, but in why the sell-side expert thinks that Apple shares are worth only $115 – representing 13% downside risk.
Some bullishness first
In its note, Wolfe Research presented what seemed to be positive reactions to Apple’s product refresh event of April 20. Here are some key observations from the analyst:
- The M1-equipped iMac was a good surprise, since the last refresh had happened as recently as August 2020. I believe that, with the introduction of its new M1 chip and redesigned architecture, Apple will continue to accelerate product innovation.
- The iPad Pro was also redesigned around the M1 silicon, rather than the traditional A-series chip. Once again, I see Apple looking for an edge in product innovation as a way to keep demand for its devices elevated in the post-pandemic period.
- The purple iPhone 12 was Apple’s first stand-alone, off-cycle smartphone. With the 12 mini allegedly struggling to find traction, maybe the Cupertino company saw an opportunity to increase entry-level iPhone sales by simply introducing a prettier-looking case.
The analyst summarized his main observations about Spring Loaded with this quote:
“M1 expansion, not new products, is our key positive takeaway.”
Why Apple stock could correct
Now, on to the bear case. Wolfe’s argument for a 13% share price decline has nothing to do with Apple’s most recent product refresh cycle. Rather, the analyst justified bearishness as follows:
- “Throughout the pandemic, Apple has blown away its consensus estimates; [yet, the stock] has underperformed the market by [about] 10% year to date”. Wolfe is alluding to the fact that nothing else, from the perspective of financial performance, seems able to push Apple stock higher. In fact, shares have been down since January 2021 and flat since early-August 2020.
- “Residual strength in the iPhone Pro and Pro Max due to channel inventory fill should ease heading into fiscal third quarter”. In plain English, Wolfe seems to think that some of Apple’s recent sales growth may have been driven by inventory buildup at stores. As the stock of new higher-end iPhones decline, revenue growth should moderate.
- “The Mac, iPad, and Services segments face stiff compares as Apple circles onto its first full quarter of pandemic comps”. I think that a tough 2020 benchmark could, in fact, be a potential headwind, especially in the back half of fiscal 2021. How can Apple top iPad sales growth of 43% in last year’s holiday and pre-holiday quarters? The good news is that the Cupertino company has been aggressive at rolling out appealing new tablets and personal computers in the past few months.
- “We [remain] apprehensive of the expectations embedded in Apples high multiple”. To be fair, the stock’s valuations seem a bit stretched. I discussed the subject in more detail recently, concluding that:
“Apple’s rich multiples could find upside resistance from here. Should Apple stock price rise, which it very well may, it will likely be the result of growth in financial metrics (sales, earnings, cash flow) rather than valuation expansion.”
Even bulls should understand what could drive Apple share price lower. So, I asked Twitter for an opinion. Feel free to also chime in below.
Is the price right?
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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)