Does Apple's Sell Rating Threaten the Entire Stock Market Recovery?

Apple Inc. (NASDAQ: AAPL) dd not have a very solid day on Thursday ahead of next week’s earnings. While earnings season has been mixed. we have been seeing a “sell the news” reaction in many cases. There is a question about how much Apple has run up ahead of earnings, and that may be more than justified considering that Apple nearly hit $400 in mid-July. Its shares have also struggled to rally since that time.

With Apple’s earnings set for the coming week, Apple’s stock has actually almost pulled back about 7.5% from its highs. Its shares were up almost 37% year-to-date to its latest high, but the new $370 handle currently had shares up about 27% on a year-to-date basis. That is still more than impressive considering the current recession and closed economies we have seen this year.

Analysts on Wall Street had been ratcheting Apple’s target prices higher and higher in recent weeks. It was almost an alarming rate of price hikes, particularly the so-called “bullish case” issued by the street high analyst.

What is so hard to understand about the pre-earnings evaluation is that Apple was not immune to the COVID-19 recession. On top of having closed many stores, some had to go back to being closed due to rising COVID-19 cases. The entire rise has been based on the next iPhone launch that is slated for this fall. The 5G iPhone is expected to face stellar demand, but Apple is not expected to offer any firm guidance at this particular earnings report. Most companies are being very general when they are issuing guidance ahead in this earnings season.

Goldman Sachs has a caution for Apple investors at the current time. Rod Hall, the firm’s analyst covering Apple, called the huge gains that have been seen out as being unsustainable. Hall believes that Apple will not offer guidance due to the COVID-19 crisis and due to the timing of the new phone launch. His belief is that a late-September launch date is most likely, but he also noted that supply chain issues and press speculation have both brought questions about a formal date.

The firm’s formal “Sell” rating was maintained on Apple, although the analyst did raise his price target up to $299 from a prior $263 level.

Hall still believes that Apple will manage to surprise investors with better than expected execution, but even a delay of one month could trim fourth quarter estimates by 6% on earnings (per share) and by about 7% on revenues.

Where the Goldman Sachs view gets even more tricky for the Apple bulls is that the firm’s view on fiscal year 2021 has earnings roughly 15% shy of the consensus expectations. Hall is worried that unit sales are likely to be less than expected and that the average selling prices will also be realized at slightly lower levels. Another concern, which Wall Street would not receive well, is that Apple’s revenue from its services category will see slower growth.

24/7 Wall St. likes to remind readers that no single analyst calls should ever be used as a sole reason to buy or sell a stock. That is why we are taking the other side of the Goldman Sachs note by showing the most bullish analyst call out there, as well as showing a recent analyst call that is even more cautious than the call that weighed on the stock. We had noted recently that Apple and other tech leaders were beginning to look overly frothy.

The most bullish call is quite optimistic. Would you expect anything less, particularly on the mighty Apple? Shortly before Apple’s stock peaked at almost $400, Wedbush’s Daniel Ives raised his formal price target to $450 from $425 while reiterating his Outperform rating. That was a street-high target, and Ives had just raised that target to $425 from $375 in June. The “bullish case” moved all the way up to $525 after having been raised to $500 less than a month earlier. Ives has been quite positive on the coming iPhone launch, and this is the time he expects that iPhone supercycle will be seen from new phone sales and more ecosystem growth.

The view of Mr. Ives is that China will play a considerable role here, and he even called Apple out as his favorite name to play the 5G theme. Lastly, Ives sees a further re-rating of Apple’s stock on the horizon.

Nomura Instinet’s Jeffrey Kvaal did not have a Sell rating, but his Neutral rating came with a $250 price target back on July 7. Kvaal’s view is that the iPhone 12’s visibility is rising. He also points out that Apple is not aiming higher on the iPhone 12 than it did on the iPhone 11. Instinet’s report showed that U.S. carriers are more willing to promote the device and that its launch timelines remain steady, but Kvaal’s read on Apple’s component orders reinforces a view that the iPhone 12 is going to fall short of that mythical supercycle.

Instinet’s $250 target price for Apple was based on roughly 17-times the firm’s 2021 earnings estimate of $14.53 per share.

As for why Apple could be enough to upset the entire market, it’s not just the performance that has already been seen. Apple is now a $1.6 trillion company by market cap. It would be even higher if it had not spent so much buying back stock, but that is another matter. Apple has been one of the key leadership stocks in this recovery rally, and seeing sell-offs after strong earnings from Microsoft and Tesla (and now Intel) may put more fears of “sell the news” in the minds of traders and investors alike.

Another question that can always be asked is if Apple’s cash balance alone will give it the edge to be among the 100-year survivors.

Apple was down 4.8% at $370.40 late on Thursday. That is down almost 7.5% from its high of $399.82 that was seen earlier this week. The Refinitiv consensus analyst price target was last seen at $370.26.