Why Citi's Huge, Bullish Apple Call Isn't All That Bullish

The mighty Apple Inc. (NASDAQ: AAPL) has recovered handily off of its lows in 2016, and some investors and analysts think it can rally much higher. When investors read about five reasons Apple is going to soar in 2017 in a Citigroup research report, they probably assume that an incredibly bullish analyst call has been issued. There is at least one issue to consider here: the Citi call just isn’t all that bullish compared with the rest of the analysts.

Citi’s analyst following Apple is Jim Suva, and he noted that Apple shares could rally in 2017 for five reasons. While this is a reiterated Buy rating, the note should hardly be anything “soaring” for traditional investors.

24/7 Wall St. tracks dozens of analyst calls each day, on average, and this turns into hundreds of analyst calls each week. What needs to be considered is that analysts with Buy and Outperform ratings on Dow and S&P 500 stocks have typically around 8% to 15% in implied upside to the price target at this time in the bull market. If Citi’s Buy rating comes with a $130 price target, that is about 14.7% in implied upside from the prior close, not counting the dividend.

OK, so sure, this is at the top end of a range of upside, but even if you throw in the 2% dividend yield, it just is not all that impressive for the mighty Apple. Remember that Apple is the top brand in the world by many counts, and it has the largest market cap of all public U.S. companies.

Citi’s five points were listed on the CNBC site as follows:

  • iPhone 8 Super Upgrade Cycle driven by newer form factors driving a stronger upgrade relative to the prior 2 cycles
  • Tax reform benefit from reduction in corporate taxes and cash repatriation
  • Sticky user base which drives continued services revenue growth
  • Enterprise push mid term, Applewood longer term
  • Attractive valuation – Shares trade at a slight discount to their 4 year median multiples despite improving fundamentals ahead

What matters is that Apple has been a disappointment in 2016, and it failed to live up to anywhere close to its base bull-bear case for 2016. Apple’s consensus analyst target from Thomson Reuters at the start of 2016 was $148, but that consensus is now closer to $131.

With the S&P up 10% so far in 2016, Apple’s pre-call gain of more than 7% has just not been that impressive.

If investors want a real bullish outlook on Apple, they should perhaps consider Credit Suisse’s Outperform rating and $150 price target that was just reiterated on December 6. Its thesis has much overlap with Citi but was focused on looking forward to the iPhone 8 super-cycle. That view was that gross margin concerns and the concerns around OLED capacity have been overblown. Credit Suisse’s Kulbinder Garcha said in his report about the supply chain:

Near-term checks supportive. Supply chain checks from our Asia team are supportive of iPhone strength, particularly around the mix. December quarter builds are expected to be 87mn, the highest quarterly build number we’ve seen historically. Additionally, the mix of the iPhone 7 Plus continues to be strong, with the 7 Plus expected to make up ~45% of the iPhone 7/7 Plus mix, materially higher than the ~35% we currently estimate.

Citi did note that Trump’s plan to cut corporate taxes to 15% from 35% would add about 6% to Apple’s earnings per share. The firm also noted that if 25% of proceeds from repatriation were used in share buybacks that it could boost earnings per share by another 10%. Unfortunately, these seem more or less in line with other views on Apple out there.

Apple shares were up with the broader market on Tuesday. Its stock gain was 1.5% to $115.00, leaving 13% to the current target, and Apple has a 52-week trading range of $89.47 to $118.69.

Note that Apple’s consensus analyst price target is currently about $131.50, so Citi is actually under the consensus from Thomson Reuters. This is far from a bearish call in Apple. It also just isn’t all that bullish for Apple compared with other expectations as a whole.