Two Sides of Wall Street Disagree on Apple: What This Means For Broader Market — ICYMI

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Analysts and investors disagree on the coronavirus’ impact on Apple. Analysts have remained largely bullish, while investors -- buying opportunity or not -- have sold the stock almost as much as they’ve sold the rest of the market in the U.S. 

Apple  (AAPL) - Get Report shares, down almost 10% Monday, are down 22% from their all-time highs in February. That’s almost as ugly as the S&P 500’s bear market sell-off of roughly 25%.

Apple, trading at $250 a share, is now priced at 18.5 times the next 12 months’ earnings per share. That’s far below the near 25 times it hit when it was at its all-time high. The average analyst price target on the stock is $328, representing a 24 times next year’s EPS valuation. Higher growth and higher margin services, plus a 5G cycle that could last several years have expanded Apple’s outlook for many years to come, boosting the valuation. 

The current multiple could indeed expand, as analysts may come out and lower 2020 estimates because the company announced Friday it is shutting down all stores outside of China. China appears to be on the road to recovery, while the global pandemic worsens elsewhere. 

Still, analysts have largely stuck to the following thesis: Lost hardware sales in early 2020, including the 5G cycle, will be regained. Services revenue will be untouched. 

Some analysts did bring their 2020 numbers down, but the price targets have remained largely the same, as analysts value the company mostly on 2021 earnings, applying their multiples to that year. 

“We believe investors are starting to look past these anomalous 3-6 months towards a more normalized FY21 valuation framework when it comes to the stock,” wrote Wedbush Securities analyst Dan Ives in a note reacting to Apple’s Friday announcement. 

Setting 2021 aside, analysts are still looking for 12% earnings growth in 2020 to $13.31 a share. 

But investors, who have real money at stake and can be more sensitive to risk than analysts are, have priced in a lost 2020 campaign. 

The stock could still be a buy when this virus catastrophe is all over. And fortunately for Apple investors, the company hasn’t announced a reduction in its stock buyback program, which is a considerable part of the earnings growth picture. 

This implied debate between the buyside and sell side on Apple is about 2020 performance. That’s key for investors to observe. Currently, broader market bulls and bears — strategists and wealth managers — are debating the same for the economy. 

The thesis on the global economy when the virus first broke out was that a first half dent to growth was inevitable, but that the second half would be as strong as initially expected because people and businesses would resume activity as usual. 

But some are getting wary that the resumption of growth — whenever this nightmare goes away — will be slow. Retail stores will open slowly. Consumers will be traumatized. Supply chains will be slow to start back up. 

Starbucks  (SBUX) - Get Report could be a useful indicator. Analysts have cut not only their first-half revenue and earnings estimates, but also their third- and fourth-quarter estimates. Sure, Starbucks isn’t like Apple. If a customer doesn’t buy coffee in March, he or she isn’t going to wake up on an October morning and make sure to buy two cups of coffee. Apple’s products may indeed sell that way. 

So of course, Starbucks is going to see 2020 estimates fall on account of the first half. But management also said it is reopening stores at a slower clip than initially expected and implementing safety restrictions. Not only have analysts worked that into their estimates, but some analysts have moved their 2020 earnings multiples lower because their out-year estimates on store openings came down. 

The point: this market may turn around when the virus news does as much, but stocks may be pressured well after that. 

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