Big Investors Aren’t Done Buying Apple Shares, Analysts Say

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Whatever the risks Apple faces, big investors still plan to buy more of the tech giant’s shares, according to analysts.

Apple reports at the end of January for the quarter ended in December, and those numbers could catalyze the stock.

Investors want to see that their expectations for earnings growth over the next one and two years — 10% and 15% — are affirmed. Part of that result would be services-revenue growth in the mid-teens percent.

The most important ingredient for 2020 is the 5G ramp. Analysts have recently touted the opportunity as a multiyear one that can bear significant fruit in mid-to-late 2020.

D.A. Davidson analyst Tom Forte recently told TheStreet that while management is unlikely to give specific details on 5G production, “to the extent that the company’s comments suggest that they’re preparing for next-generation, even if they don’t indicate exactly how they intend to do so with the new phones, that will be a good cue for investors.”

In mid-2019, Apple’s multiple was expanding significantly as the Cupertino, Calif., company rolled out new services like Apple Card for payments, Apple TV+ for streaming video and Apple Arcade for gaming.

But when 5G expectations for the next three years suddenly shot up — analysts were seeing production ramps from 5G-chip makers — the multiple expansion added another dimension. Apple now trades at roughly 24 times next year’s earnings.

Risks-reward balance aside, money managers are still considering buying more of the stock.

“Active inflows and rising estimates support Apple shares in fiscal year 2020,” Morgan Stanley analyst Katy Huberty wrote in a note.

“We still believe a significant number of investors are offsides relative to the upcoming 5G smartphone cycle and expect continued inflows as earnings estimates rise over the next year.”

In late November, Huberty said institutional managers were telling her they wanted to buy more. And they did. The stock is up 20% since that date, and Huberty sees the trend continuing.

Other analysts see the same trend.

“Our stock self-propelling thesis (active managers buying the stock not to underperform their benchmarks) is still in play,” wrote Cowen analyst Krish Sankar. He meant that active managers who want to ensure their funds outperform the market will buy a few more Apple shares, as they see continued upside in the stock.

That’s another point consistent with Huberty’s comments. She says earnings expectations for the buy side, the world of investment funds, call for Apple to earn $17 a share in 2021. The sell side, the analyst and investment banking world, sees 20201 EPS of $15.12.

Of course, the biggest risks to Apple in 2020 are the prospect that 5G demand could falters and that production could hit a snag.

Longer-term, Apple TV+ is still light on content and the company has plenty of cash to invest. This could be a tailwind for the streaming service, which is currently priced at $4.99 a month. That's the cheaper end of these services.

“The TV service appears competitive and the potential to monetize across the 900 million-plus iPhone installed base increases with new content offerings each year,” Sankar wrote.

He did note that investors should be aware that Apple is beginning to amortize new content, a non-cash expense, which will be reflected in Apple’s profit margin in 2020.

With analysts seeing upside to long-term forecasts, Apple's multiple could still expand. Huberty’s price target for Apple shares is 29 times her 2020 earnings forecast.