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With a below-market price target of $200, Bernstein analyst Toni Sacconaghi argues for paying less for Apple than, say, Nike or Louis Vuitton.

From Should Apple be valued like a consumer brand?, a note to clients that landed on my desk today, a day late:

Having recently become the first trillion-dollar company in history, Apple now trades at 17x consensus forward EPS, the highest multiple that the stock has enjoyed in over half a decade. We believe this reflects improved investor sentiment after a better-than-expected Q3, which may have given new life to a longstanding bull case – that Apple’s stock can secularly re-rate to trade more like a high-end consumer brand rather than a traditional tech hardware OEM.

On the one hand, it is not necessarily far-fetched to argue that Apple could be valued more like a consumer brand a la Coca-Cola, Estee Lauder, Nike, or Louis Vuitton, all of which command P/FE multiples ~20% higher than Apple’s valuation today. Like many consumer brands, Apple enjoys remarkable customer loyalty, high ROICs, and relatively stable cash flows (particularly as the company expands its recurring revenue streams from Services).

That said, we see some shortfalls in the comparison. Consumer brands typically have very resilient revenues and free cash flow, driven by timeless products that do not go obsolete; as a result, we rarely see steep revenue declines for consumer brands over the long-term. In contrast, the vast majority of Apple’s revenues are derived either directly or indirectly from the iPhone, which – like all tech hardware – is fundamentally subject to replacement cycle elongation, commoditization, and/or outright disruption.

On net, we believe that Apple’s persistent valuation discount to top consumer brands is likely warranted, although the magnitude of the discount is debatable. For the stock to re-rate to the level of a top consumer brand, we would likely need to see the company migrate its current transactional selling model to a subscription-based model.

Maintains Market Perform rating and $200 price target.

My take: Sacconaghi writes in conclusion that he sees the risk-reward on AAPL as “favorable” in the near-term, but his price target says Apple at $228 is in nose-bleed territory, headed for a fall.

Below: Apple’s PE over the past five years.

Click to enlarge.