AAPL stock is showing signs of life again today after an analyst described investors’ bearish view on it as investors are neutral to underweight on it while hedge funds have been on the short side. Once again, the iPhone 8 “super cycle” is a key part of the bullish thesis, along with optionality from the company’s capital allocation.
Meanwhile, another expert believes that investors are simply having trouble seeing AAPL stock as that of anything more than a hardware company.
Earnings could change everything for AAPL stock
It’s been onward and upward for AAPL stock year to date with a nearly 14% gain after a 2016 full of peaks and valleys. Despite last year’s shakiness, the iPhone maker’s shares are still up 40% for the last 12 months.
In a research note dated Feb. 5, RBC Capital Markets analyst Amit Daryanani said his discussions with investors after Apple’s December quarter earnings report indicated that most were neutral to underweight going into the report. He added that they were expecting a “stable to modest pullback” in Apple stock, but of course that hasn’t materialized. As a result, their new question is whether to build their positions on the rise or to wait for another “air pocket” such as the guidance for the June quarter.
Where is the ceiling for AAPL stock?
He reported that hedge funds have been staying long on the company’s suppliers while “using AAPL on the short side.” However, the stock is now “materially outperforming” the stocks of its suppliers. As a result, the debate has now shifted to where upside on Apple stock will run to, and he said most investors see it around $140 to $150 currently.
However, Daryanani believes a big uptick in capital allocation could surprise and change the narrative. The company did add $10 billion to its debt within days of its earnings report, bringing its total debt to almost $100 billion. This round of bonds will include floaters and fixed rate notes in various tranches.
AAPL stock is a buy on dividends, iPhone 8
The analyst suggests that the company might boost its dividends by more than 50% against the current payout of about 22%. He notes the $246 billion in cash it has on hand, although 94% is overseas, and the ability to generate $50 billion to $70 billion in annual free cash flow.
As a result, he believes the iPhone maker is in the “dividend growth” category and thus might “attract a host of new investors and importantly provide downside report.” A 50% payout would bring the dividend yield to about 4%. Based on his suggestions about capital allocation, he sees a path for AAPL stock to climb to $160 to $170 per share.
The RBC analyst also doesn’t feel that current models include “anything like a ‘super cycle'” in them, based on his estimate of an installed iPhone base of about 750 million active users and the 27- to 28-month replacement cycle.
AAPL stock being valued only as hardware
UBS analyst Steven Milunovich spoke with Above Avalon founder Neil Cybart recently and outlined their conversation in a note dated Feb. 6. Cybart feels that the market’s biggest problem with Apple stock right now is seeing it as anything more than a hardware stock. Instead, he referred to the iPhone maker as an “experiences company” based on the ecosystem it is still building and its services narrative, which includes more users and rising revenue per user. Management even said in the most recent earnings report that they expect services revenue to double.
Despite the focus on the ecosystem, Cybart doesn’t believe the iPhone is done just yet. However, he also warned that the iPhone 8 might not cause “an unusual surge of upgrade” because of how diversified the user base is. Further, Milunovich notes that this could be the first time the company introduces three models at one time, making predictions even more difficult.
More opportunities for Apple
Beyond the iPhone though, the expert noted that the company wants to both create and distribute content, possibly by combining them into “an entertainment bundle.” Cybart doesn’t believe it’s necessary for Apple to make “large content acquisitions,” although he’s bullish on the company’s opportunities in wearables, including the Apple Watch and AirPods. He also believes the iPhone maker eventually wants to make cars.
Further, he expects the multiple on AAPL stock to expand, and Milunovich advises investors to buy it for the fiscal 2018-2019 product cycle. The stock rose to as high as $132 during regular trading hours today.
