Consumer Electronics

Why Wells Fargo Is Upgrading Apple Now

The broad markets were left in shambles on Monday as both the Dow and S&P sold off significantly. However this may have created a buying opportunity. Some analysts and investors would believe so, as companies like Apple Inc. (NASDAQ: AAPL) were down over 5%. As a result, a key analyst upgraded its view on Apple based on this correction.

Wells Fargo’s Maynard Um upgraded Apple to an Outperform rating from Market Perform with a valuation range of $125 to $135. The firm said that Apple’s correction is overdone, and while its concerns remain, the share price justifies a higher rating.

CEO Tim Cook provided some comfort for the September quarter, which will be important into earnings. While the investment bank noted that its fundamental stance on Apple’s challenges was unchanged, it believes shares have overcorrected.

Cook’s email to CNBC’s Jim Cramer said that iPhone activation growth in China “has actually accelerated over the past few weeks,” which gives better visibility into the September quarter. Wells Fargo also brought up Apple’s third party manufacturing and component commitments, which suggest upside potential to its $49 billion to $51 billion guidance.

While Wells Fargo’s concern on tough compares for the December quarter are unchanged, and estimates remain below the Street, the firm believes the stock had been reflecting this challenge and see the incremental sell-off as now presenting a more attractive risk/reward.

ALSO READ: Why Analysts Will Slash Price Targets Even If They Keep Their Buy Ratings

The investment bank has a few reasons why it is “incrementally more positive” on Apple:

  • China seems less of an issue, given Cook’s comments, which potentially lowers risk to the September quarter.
  • Stocks with lower relative risk heading into earnings should be better positioned on a relative basis.
  • Sentiment appears to acknowledge tough December comps and potential for units to be down year over year.
  • Favorable risk/reward at eight times fiscal 2016 estimates free cash flow, in Wells Fargo’s view. While U.S. iPhone carrier programs may help on the margin, the firm is not under the assumption that it will be material as it only accounts for quarter of the global market.

It is worth noting that Wells Fargo does not use Apple’s cash balance as a backstop to becoming more positive, as the market had not given shares the benefit of its cash balance, in the bank’s opinion.

According to Wells Fargo, the investment thesis was:

We believe the risk/reward at 8-times our free cash flow is tilted favorably with China strength appearing to have continued recently and the quarter having some visibility, which we see as important heading into earnings.

Shares of Apple closed Monday down 2.5%, at $103.12 in its 52-week trading range of $92.00 to $134.54. In early trading indications on Tuesday, shares were up 5.2% to $108.51. The stock has a consensus analyst price target of $146.88.

Apple shares have declined roughly 22% since mid-July and 8.5% since last Thursday’s close, versus S&P down 10.2% and 7.0%, respectively.

ALSO READ: Where Will Warren Buffett Put Money as Markets Collapse?

Sponsored: Find a Qualified Financial Advisor:

Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to 3 fiduciary financial advisors in your area in 5 minutes. Each advisor has been vetted by SmartAsset and is held to a fiduciary standard to act in your best interests. If you’re ready to be matched with local advisors that can help you achieve your financial goals, get started now.