It’s a well-documented fact that the AAPL stock multiple rises and falls with each iPhone cycle, depending on whether it was weak, strong, or one of those so-called “supercycles” we’ve been hearing so much about this year. Leading up to the iPhone X release, Wall Street was whipped into a frenzy as analysts raved about the “supercycle” that would ensue, but now, the dust is starting to clear.
Analysts are trying to get a sense of where AAPL stock will go next, and not all of the projections are good, despite the fact that the all-hallowed iPhone X is now in the hands of some consumers.
Contraction in store for AAPL stock multiple
There’s little doubt that AAPL stock is in for a bumpy ride, but just how rough might things get? Nomura Instinet analyst Jeffrey Kvaal warns that the AAPL stock multiple might contract so much that the shares could plummet to $130 per share. The stock currently trades above $170 per share, and it hasn’t touched $130 since early this year. However, many people may have missed this forecast because it wasn’t mentioned in the first couple of pages. Talk about burying the lede.
Kvaal remains as bullish on AAPL stock as ever, despite his warning that the multiple could contract significantly after the iPhone X cycle. He noted that the AAPL stock multiple has run in cycles since 2010, expanding ahead of a major redesign, such as the iPhone 6 in 2014 and the iPhone X and iPhone 8 this year. After expanding before the redesign, the multiple typically contracts the following year.
How much will the AAPL stock multiple contract?
According to Kvaal, the AAPL stock multiple contracted after the iPhone 6 cycle in the 6s cycle the following year due to “lower off-cycle demand and upgrades.” He added that currently, the multiple is around 14.5 times, but over its cycles of expansion and contraction, it has averaged 12.4 times since 2010, with the bottom end of the range at 8 times and the top end at 15 times. In other words, the AAPL stock multiple is currently near its historic top, which can’t bode well for the shares in the near term.
The Nomura Instinet analyst believes that the expansion of the AAPL stock multiple is “likely in the later innings,” meaning that the shares could be about to fall off a cliff.
What this could mean for AAPL stock
Kvaal warned that the contraction in the AAPL stock multiple “could be meaningful,” as the P/E has averaged 9 times after a supercycle. He also added that every point the multiple contracts is equivalent to about $12 or 7% downside in AAPL stock. In this case, he pegs downside in the stock at $130 after the iPhone 8/X cycle, which would be a P/E multiple of 10 times his calendar 2019 earnings per share estimate.
Of course, the multiple is only one part of a stock price, with earnings being the other key part of P/E multiples, in this case. Kvaal sees earnings per share upside in the December quarter and into fiscal 2018 and later. He also notes that tax reform and/ or cash repatriation will have an impact, if either event ever happens.
His price target on AAPL stock is $185, which is a multiple of 13.1 times his upside estimate for Apple’s fiscal 2019 earnings per share but 15.4 times the consensus earnings estimate for fiscal 2019. Applying the current multiple of 14.5 times to his upside earnings per share estimate would put AAPL stock at $205 per share.
A fall to $130 probably won’t shake AAPL stock
For those who see Apple strictly as a long-term investment and not a trading stock, a plunge to $130 might not seem like a big deal because they’re assuming that the shares will recover. However, buying any stock is a gamble, even one like Apple. On the other hand, should the shares fall as low as Kvaal is predicting or even lower, you can bet that there will be plenty of takers just waiting to scoop up more stock on the pullback.
Of course, things could look very different a year from now. It all depends on what Apple does next, whether it’s able to monetize its user base more fully, if it enters a new product category, etc.
AAPL stock slipped in intraday trading on Tuesday, falling by as much as 0.7% to $172.88.