“Valuation has overshot realistic long-term fundamental outcomes.” —Analyst Katy Huberty
From a note to clients by that landed on my desktop Friday:
Positive sentiment on Apple has waned as multiple iPhone build cuts and negative press around macro and geopolitical headwinds have re-rated shares to their lowest point since June 2017.
While short-term oriented investors are focused on March quarter guidance being a risk to owning shares, more long-term oriented investors are rethinking their valuation framework to embed a worst case scenario of iPhone replacement cycles and ASPs.
For instance, assuming iPhone replacement cycles shift to 4 years from 3 years today, in-line with PCs, and iPhone ASPs remain below $800 indicating iPhone has hit a price ceiling, our SoTP [sum of the parts] implies a still attractive $185 share price all else equal which is driving more constructive conversations with investors who can look beyond near-term headwinds.
Looking at this analysis another way, Apple’s current share price embeds either a 7-year iPhone replacement cycle or $450 ASP — both overly pessimistic in our view (Exhibit 8; see below).
Of course, other risks exist such as a more permanent Services deceleration or lack of impact from 2019 Services and Wearables product launches which may also be influencing SoTP valuation. The conclusion is that valuation has overshot realistic long-term fundamental outcomes barring any new risks that emerge during the January 29th earnings call.
Maintains Overweight rating and $211 price target.
My take: Without making any promises about next week’s guidance, Huberty is telling long-term investors to sit tight.
*152.70 was Thursday’s closing price. By midday Friday Apple had broken $157.