This may not come as a surprise, but Wall Street research analysts love Apple (AAPL) with 47 Buy ratings, 7 Holds and only 1 Sell, with an average 12 month price target of $148.50, about 33% higher than current levels.
Wall Street analysts also love Google (GOOGL) with 45 Buy ratings, only 5 Holds and no Sells with an average 12 month price target of $853, or about 12% higher than current levels.
What’s most interesting about this mega cap tech love affair is that GOOGL has grown into its recently increasing Wall Street price target as the stock is up an eye-popping 44% year to date, gaining more than $200 billion in market cap (now $520 billion), only second in the U.S. to AAPL.
Earlier this past spring, AAPL was within 12% of its average price target, before the stock’s 16% decline from its all time high made in late April.
Yesterday AAPL had a rough go-round with its normally agreeable analyst coverage with three bulge bracket brokerage firms lowering estimates and targets, per Bloomberg:
Morgan Stanley lowered its forecast for iPhone unit sales and now estimates a drop of 6 percent in fiscal 2016, according to a Dec. 13 note. The decline is due to higher prices in international markets, excluding China, and maturing smartphone penetration in developed countries. China is the only market with year-over-year iPhone demand growth in the December quarter, according to the report.
JPMorgan Chase & Co. published a report the same day saying “November sales signal signs of early weakness of iPhone 6S cycle.” The bank lowered its forecast for iPhone units to 75 million to 77 million in the fiscal fourth quarter, down from a previous prediction for 75 million to 80 million units.
And from Barron’s:
Barclays’s Mark Moskowitz reiterated an Overweight rating but cut his price target to $150 from $155, after trimming his March-quarter estimates to 57 million units of iPhone from 60.5 million.
Obviously there is a a lot of guess work in reading the tea leaves from AAPL suppliers. Just this morning a UK based chip supplier, Dialog Semiconductor, who counts AAPL as its largest customer cut its December quarter sales outlook. Per Bloomberg: $390 million to $400 million, below its previous forecast of $430 million to $460 million. This seems to be a quarterly occurrence where an AAPL supplier’s miss-execution is immediately extrapolated to reduced orders from AAPL, but this can be tricky as it presumes the supplier adequately forecasted its AAPL revenue contribution in the first place.
Switching gears. One cause for the AAPL’s woeful relative underperformance this year (to mega-cap tech peers AMZN, GOOGL & FB) is the realization that the current quarter will be the first December quarter to see iPhone sales decrease year over year. The company is facing a very tough comparisons to last year which was the first full quarter after the introduction of larger screen phones of which they sold 75 million.
The high end smartphone market is maturing and becoming saturated in developed markets, and growth in emerging markets is the key. China has been growing 100% yoy, which has picked up a ton of slack as the rest is a mess. And the continual devaluation of the yuan could be a headwind for AAPL who now sees China as its second largest revenue contributor by region.
While the stock is very cheap at less than 10x eps (ex cash) it may be a struggle for the company to hit the consensus 5% earnings and sales growth expected in 2016 off of such a massive base of $233 billion.
It’s been our view since the all time highs in the Spring that the stock would be range bound with a push and pull among investors. Between the company’s massive commitment to cash return, killer balance sheet and dominance in the high end smartphone space, vs the inability for the company to achieve double digit earnings and sales growth again anytime soon.
Yesterday, the stock bounced off of what was important psychological technical support at $110, but the the Aug 24th opening and closing low near $105 could definitely be a near term target on the downside.
This morning the stock is down more than 1% on the Dialog news, I suspect $110 is once again a place the stock should pause, but below that there is an air pocket down another few percent.
AAPL is a stock that has traded on the promise of a strong pipeline of new innovative products. But their innovation hasn’t been getting it done lately. There is still a great smartphone in the iPhone 6s (some would argue recent advances are purely evolutionary) which makes up two thirds of the company’s trailing $233 billion in sales, and a strong Mac line-up. But the iPad is dying a slow death, services is a mess (see recent Music subscription service launch) and the Watch is a dud (I don’t care if they sell 6 or 8 million). The point here is that the company has NOT a had a new hit since the launch of the iPad in 2010, and investors have started to take notice. I (as many others) have made the argument recently that AAPL’s next great opportunity lies in services (On Mobile Social Apps & Services), and the company’s ability to unlock value and expand their existing ecosystem is right under their noses. I suspect it will take a couple quarter’s of decelerating iPhone growth for the company to finally get apps and services right. That’s shaping up to be a 2016 thing.