Apple (AAPL) - Get Report received two price target increases, a downgrade and a positive outlook on its capital allocation efforts from Wall Street firms on Friday. The stock is trading up over 22% YTD and boasts 28 buy ratings and 10 hold ratings from analysts surveyed by FactSet. On Friday afternoon, shares were essentially flat at $140.83.
The downgrade came from Needham, which lowered its rating on Apple from a strong buy to a buy, but raised its price target on the stock to $165 from $150. Needham wrote that the downgrade was simply a result of Apple coming within 6% of its previous target price, with the stock remaining the firm's top stock pick. "When we put a $150 target price on AAPL last March, some said we were crazy," Needham senior analyst Laura Martin wrote in the note.
Apple remains Needham's top pick because of its recurring revenue streams, the iPhone's dominance in the growing mobile ecosystem and its price relative to other giants in the Internet and content sectors. "Despite the fact that AAPL's profit metrics are higher than world-class content companies such as Disney and CBS, and its asset efficiency is higher than world class internet companies like Facebook and Expedia, AAPL's valuation is dramatically below these companies," Martin explained.Apple currently sports a 15.7 p/e multiple on its estimated 2017 earnings, compared to 18.7 for Disney (DIS) - Get Report and 27.1 for Facebook (FB) - Get Report .
In addition, the company has limited downsides, Needham pointed out. Apple has net cash of $169 billion, 8% free cash flow yield, a robust share repurchase program and a 2% dividend yield. Apple has also perfected its release strategy, working up enough demand for its updated devices in between its periodic "hit" device releases.
Apple's second price target increase came from Nomura, which gave it a significant boost to $165 from $135 and kept its buy rating on the stock as a result of data indicating a stronger-than-expected iPhone 8 cycle. "Our analysis of App Store data and recent Asia Tour insight fuel our conviction that the iPhone 8 super cycle will be significantly larger than consensus anticipates," Nomura Instinet analyst Jeffrey Kvaal said in the note.
The iPhone 8 is expected to get a major redesign as the 10th-anniversary edition of the iPhone and is expected to be released in September. Due to the large portion of the iPhone installed user base that's still using older iPhones, Wall Street is underestimating the amount of people who are going to upgrade to the iPhone 8, Kvaal argued. He sees Apple selling 87 million iPhones in its fiscal first quarter beginning October 1, vs. Wall Street's expectations of 82 million units sold. In addition, Kvaal sees Apple selling 260 million iPhones in fiscal 2018, vs. Wall Street's estimates for 239 million.
In addition, RBC Capital Markets analyst Amit Daryanani released a note on Friday morning saying he expects Apple to make an update to its capital allocation program during its next earnings call on April 25. The firm expects Apple to increase its capital allocation program to somewhere in the range of between $35 billion and $40 billion, including an increase to its dividend of 15%. Apple's capital allocation program is partly why his firm has a buy rating and $155 price target on Apple, Daryanani said.
On average over the past three years, Apple has spent $6 billion per quarter on its capital allocation program, according to charts included in RBC's note. Apple has spent an average of $2.9 billion per quarter on dividends since 2012.
Like Needham, RBC Capital Markets pointed to Apple's relatively low valuation as a reason for its buy rating, saying it was undervalued considering it has $240 billion-plus in cash overseas. This is important because Trump promised during the campaign trail to make it easier for companies to bring cash home by lowering the repatriation tax rate. "We believe AAPL's current stock price creates an attractive entry point for investors to benefit from its ability to return to revenue and EPS growth in FY17," Daryanani said.