Apple Seen Taking Smartphone Market Share — and the Stock Could Use it

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Although Apple  (AAPL) - Get Report stock finally came down to earth (a little), an analyst at Cowen said on Tuesday he sees the tech giant taking smartphone market share and raised his price target. The stock may be on a tear of late, but its earnings drivers seem relentless. 

The Stock

The stock is up 33% just since July 28 on a fresh batch of upward revisions from analysts combined with continued outperformance in big tech stocks. But the stock, which hit an all-time high of $503 Monday, is now trading at about 32 times 2021 FactSet earnings-per-share estimates. That may look a bit lofty considering that EPS is projected to compound at an annual rate of 7% for the next three years. In a moment during which many investors are wondering whether some large-cap tech stocks are a bit overstretched -- and the group has seen some brief drawdowns this summer -- it isn’t a surprise to see the stock pull back Tuesday. 

Tuesday, Apple shares fell 1.5% to $495 by 2:20 EDT, while the NYSE FANG Index had risen 0.66% by that time. 

But there are still potential drivers of the stock from here, both on a short-term and long-term basis.

Another Price Target Bump

First, Cowen analyst Krish Sankar raised his price target on the stock to $530 from $470. Sankar raised his multiple on both main business lines, hardware and the higher margin services segment. “The higher core hardware P/E [price-to-earnings] is driven by potential for share gains in the premium segment entering the 5G upgrade cycle,” Sankar wrote in a note. He pointed out that Huawei, China’s premier tech hardware and smartphone giant, is seeing headwinds from the Trump administration, which is banning U.S. chip makers from supplying Huawei’s devices. Sankar expects Huawei to build 51 million units in the third quarter, down from an initial forecast of 56 million. 

Sankar added that Huawei is only tracking at 46 million smartphone builds for the fourth quarter, down from a previous estimate of 57 million. And he thinks the company will only make 50 million phones in all of 2021, for a 71% year-over-year decrease. Meanwhile, Apple is on pace to build 43 million phones in the third quarter, according to Sankar’s checks, up from a prior estimate of 40 million. And while that represents a year-over-year decrease in the COVID-riddled 2020, it also represents 23% quarter-over-quarter growth, pointing to the hardware rebound investors are expecting. Total second-half 2020 iPhone unit sales could fall only 1%. Sankar sees Apple taking 15% global market share of smartphones in 2021, up from 13% in 2020. 

The point on the short-term: If Sankar is right, this market share could certainly support the stock for the time being, and that’s before we even consider that he sees this opportunity as more than short-term, given that he raised his multiple on hardware.   

The broader longer-term thesis continues to evolve in Apple’s favor as well. 

The Services Story

Sankar raised his multiple on the services business to 41 times from 35, citing the recurring nature of much of the revenue stream. 

And other analysts are only getting incrementally more bullish on services. 

Morgan Stanley’s Katy Huberty wrote in a note that Apple can sustain services revenue growth for the next 6 years, as users are loyal to services and the company maintains its installed base. She sees revenue growing at 8% annual over that period, but EPS growing at around 11% as margins expand and the company buys back its stock. 

The point: investors are currently willing to pay up for Apple, which has a wide field of opportunities to maintain its growth for years to come. 

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