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Apple Stock Falls Despite iPhone 8 Hype

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Apple Inc. (AAPL) stock took a tumble on Wednesday despite price target increases from multiple firms this week. The iPhone maker’s shares have been soaring unabated for most of the year as analysts have happily plugged the Legend of the iPhone 8, which could just end up being a much larger than life version of what this year’s model actually ends up being.

So does the about-face in Apple Inc. (AAPL) stock today mean that investors have finally come to their senses? Perhaps. Or perhaps it’s more about the uncertainty that’s involved when a chip giant like Qualcomm levies some serious accusations against Apple Inc. (AAPL) and sues the companies that will manufacture the iPhone 8. Even a string of price target increases for Apple Inc. (AAPL) stock probably can’t wipe that out, especially when the house of cards has been built on the iPhone 8.

Apple Inc. (AAPL) stock price target boosted for higher multiple

BMO Capital Markets analyst Tim Long is one of those who raised his price target for Apple Inc. (AAPL) stock this week. He bumped it up to $170 from $160 in a note dated May 16, citing a precedent for a higher P/E multiple on the shares. He noted that Apple Inc. (AAPL) stock has been trading at about a 10% discount to the market, which was about where it was before the iPhone 6 was released in 2014. He also noted that the multiple closed that gap with the market entirely by the time the phone launched.

Of course all of this assumes that the iPhone 8 really is as spectacular as analysts want everyone to believe. Canaccord Genuity analyst T. Michael Walkley also boosted his price target for Apple Inc. (AAPL) stock this week. He did so on Tuesday, pushing his target up to $180 from $165. He said his surveys suggest “strong consumer interest in and anticipation for” the iPhones that are expected to be released in September, a.k.a., the iPhone 8.

It’s certainly not the first time an analyst has cited the tenth anniversary iPhone as the reason for an upgrade or price target increase, and it probably won’t be the last. It’s a broken record at this point.

What should the multiple on Apple stock be?

So if consumers really do gobble up the iPhone 8 as analysts expect them to (and they probably will, even if it isn’t everything analysts have been hyping it to be), then what should the P/E multiple on Apple Inc. (AAPL) stock be? UBS analyst Steven Milunovich has embarked on a five-part written journey to discuss this very topic.

In the first part, dated May 16, he argued that in order to earn a higher multiple, the company will have to go down the consumer path instead of the tech path. He feels that a P/E of 14 to 15 times on Apple Inc. (AAPL) stock is “reasonable” until the company “proves it can be an annuity company longer term.” From there, he said earnings upside will drive increases in the stock price rather than multiple expansion.

He added that in order to bring about “meaningful” expansion in its P/E multiple, the company will have to change the narrative a bit so that it’s a consumer story and not a tech brand. Warren Buffett boosted his position in Apple Inc. (AAPL) stock to 2.6% recently and highlighted the consumer side of the story over the tech side, which is something we would expect of him. So the first step may have already been taken, and not by the company itself.

Apple is in the “technology design” business

In the second part of his series, Milunovich noted that analyst price targets for Apple Inc. (AAPL) stock have jumped 27% since October, while earnings estimates for fiscal 2018 have only increased 4% and estimates for 2019 only risen 12%. Meanwhile, Apple Inc. (AAPL) stock itself has climbed by more than 30% this year alone.

The UBS analyst argues that perhaps one reason the stock seems to have claimed a higher multiple is because it shouldn’t be valued as tech or consumer, but as a new category he terms “technology design.”

Apple Inc. (AAPL) stock declined by as much as 2.48% to $151.63 during regular trading hours on Wednesday.

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