Apple could have a tough fiscal 2016, and investors appear to be preparing for the possibility. The company’s price to earnings multiple has begun moving away from that of the S&P 500, which is on the rise, and Wall Street has increased its discount on Apple shares from 5% to almost 20%, according to analysts at UBS.

Apple Inc. - Institutional Investors May Be Returning But Stock May Pause

Why Apple’s multiple may be plunging

Analyst Steven Milunovich said he thinks the decline in Apple’s multiple is expectations for a deceleration in growth of earnings and revenue. Much of Wall Street doesn’t expect the next iPhone cycle to be as successful as that of the iPhone 6 and iPhone 6 Plus. He also thinks investors may be remembering the awful iPhone 5 cycle and suspect that this year’s iPhone cycle will cause déjà vu of that cycle.

However, Milunovich believes Apple’s current valuation already discounts these concerns.

Apple downside limited

He thinks Apple will have to report flat iPhone units in fiscal 2016 in order for the stock to stay where it is now. He sees limited reason for downside because this time around, the product mix supports a strong gross margin, unlike the decline of six points that happened in 2013.

Additionally, he thinks the lower multiple, increases in returns to shareholders lower optimism on Wall Street today compared to the beginning of fiscal 2013 suggests little room for Apple shares to fall.

Institutional owners coming back to Apple

Milunovich also noted that there are signs of institutional investors returning to Apple. Although institutional ownership has fallen to 63% from 2012’s peak of 71%, analysis of 13F filings suggests that two-thirds of holders are underweight on the stock compared to its Russell 1000 benchmark weighting.

According to the UBS analyst, this is the first time in two years that the ratio of net accumulators to reducers has increased. Also we’re seeing a five-year high in the ratio of new buyers to selloffs.

Milunovich maintained his Buy rating and $150 per share price target on Apple. He said it’s understandable for Wall Street to be nervous and expects shares to “pause here.” As of this writing, shares of Apple were up 0.18% to $13.20 per share.

Tags: