Wall Street Is Souring on Apple -- ICYMI

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As the Coroanvirus began to strike in January 2020, the prevailing thesis from Wall Street on Apple  (AAPL) - Get Report shares was that lost sales in the first half of the year would be recouped in the second half, as the virus would go away rather quickly. 

Now, analysts are walking that back, not because of intricacies relating to Apple’s supply chain or the particulars of its operations, but because this virus is here to stay indefinitely. Initially, analysts had barely lowered 2020 revenue and earnings estimates. The ones that drastically lowered those, did not lower their price targets because most analyst value Apple on a multiple of 2021 earnings. 

But investors have shed the stock, sending it down 25% from its all-tome high to $240 a share. First, analysts recognized they’d have to trim 2020 estimates, which the market has to price in because the market generally operates on the next 12 months estimates. 

Still, analysts weren’t budging on price targets because they were applying multiples to 2021. This made Apple seem like a buy to many.

But two analysts, out with updated models on Apple, make their separate cases for why the situation is getting truly ugly. Wedbush Securities analyst Dan Ives lowered his 2021 estimates, as the negative impact of the virus likely bleeds into next year. Goldman Sachs’ analyst actually kept his estimates rather stable, but applied a lower multiple on earnings, not because he is reducing his free cash flow assumptions for out years, but because he simply recognizes the market’s current frame of mind. 

"We are lowering our iPhone revenues by 14% in FY20 and 10% in FY21 to reflect the change in near-term consumer demand, lockdown conditions globally, and negative economic backdrop,” wrote Ives in a note. He says he now assumes only consumers currently in the upgrade window that have not upgraded their iPhones in more than 42 months will buy new phones over the next two years. He is looking for 350 million new purchases, "as we assume going forward in a more draconian scenario that minimal new smartphone activity takes place besides this segment of Cupertino's massive installed base.” 

And with the supply chain slow to return to service and many consumers in lockdown areas, Ives is no longer modeling a 5G product release in September 2020, contrary to his previous model. 

His 2021 revenue estimate reduction is to the tune of 8%, bringing the number own to $282 billion. Ives values both hardware and services on a multiple of sales and did not appear to move that 2021 multiple, currently at 5.3 times, down. His price target did move down to $365 from $400 a share. 

Goldman Sachs analyst Rod Hall barely moved his 2020 and 2021 projections, but he lowered his target multiple on 2021 earnings to 17.5 times from 20. This doesn’t reflect lowered profit estimates for the next bulk of years, but rather it takes into account the market’s mood, as multiples across the board have collapsed. 

"We also reduce our 12-month price target to $265 from $300 based on ~17.6x PE on our unchanged CY21 EPS of $15.01 as we mark to market against a lower S&P 500 trading multiple,” Hall wrote. 

Based on historical norms, Apple can often trade at a 15% premium to the S&P 500’s average multiple. Applying that premium to the S&P 500’s multiple brings Hall’s target multiple to where it is now. Arguably, that multiple can fall from 17.5 times, as the market’s multiple has dropped below 15 since Hall’s Tuesday note. 

The point: if Apple ever becomes a buy in 2020, it hasn’t happened yet. 

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