Earlier this week, Morgan Stanley and Cowen released updated price targets for Apple at $520 and $530, respectively. Apple’s valuation has risen over the last week with increased production in current iPhone units and the expected release of a new iPhone 12, which many suspect will be 5G enabled. Although Apple has historically relied on the success of its iPhone to drive its valuation, company financials from this past year demonstrate otherwise.
Morgan Stanley’s analysis resulting in Apple’s $520 price target can be heavily attributed to the adjustment of its overall valuation. Apple’s revenue, EPS, & free cash flow have each experienced growth year over year of 6%, 12%, and 24% respectively, while iPhone sales have decreased 1% in the same period. The company’s growth, while phone revenues stalled, demonstrates the shift from Apple being identified as a hardware company to a member of the technology industry. As a technology company, Morgan Stanley was able to use an EV/FCF multiple of 30x as opposed to the 25.5x multiple for a hardware company which helped the price target to rise to $520.
Furthermore, Cowen’s analysts noted that the production of the iPhone units has slightly increased to 43M which exceeded their estimated amount of 40M units. In addition, earnings from Apple's upgrade cycle to its higher hardware has driven the potential for share gains. As a result, Apple’s 31x multiple has remained consistent with other mega-cap tech companies due to their strong revenue and free cash flow. This is good for Apple as the company seems favorable amongst its competitors not only in technology but also in the consumer staples industry.
Although the bulk of the price target hikes can be attributed to valuing Apple as a technology/consumer platform, there were several other factors that led to the increased price targets. Next week, Apple will be executing a 4:1 stock split and they are developing a subscription-based program called Apple One.
The analyst reports also identify potential risks to Apple’s stock price including the Epic Games lawsuit and WeChat’s potential ban due to the Trump Administration’s executive order. However, despite the danger these issues may pose, Morgan Stanley and Cowen still believe that Apple’s new price target should be in the lower $500 range.
Disclosure: At the time of publication, we are long Apple. We wrote this article ourselves, and it expresses our own opinions. We are not receiving compensation for creating this article (other than from TheStreet) and have no business relationship with any company whose stock is mentioned in this article.