Analysts from every Wall Street firm would have you believe that Apple stock is set up for a much brighter 2017, and the latest group to tout this view is Citi. Many analysts claim that Apple stock will move higher next year in the same note in which they present data on how weak the iPhone 7 cycle is. After all, the tenth anniversary iPhone 8 has got to do better than the disappointing iPhone 7, right?
Apple stock undervalued based on stabilizing iPhone trends
In a report dated Dec. 13, Longbow Research analysts Shawn Harrison and Frank Carson offer mixed data on the iPhone 7. It seems that consumers are quite interested in it, if Google searches are anything to go by. However, data from Apple’s suppliers muddies the picture.
We heard Drexel Hamilton’s Apple Monitor results from November recently, and Longbow adds its data points from Apple’s Taiwanese suppliers. More than 20 of the iPhone maker’s biggest Taiwanese suppliers saw a 1.1% sequential increase in sales for November, which is worse than seasonal. Their sales fell 4% year over year. The three- to five-year average is growth of between 5% and 6.2% sequentially. The Longbow team has observed good correlation between the quarterly sales of Apple’s Taiwanese suppliers and Apple itself.
The analysts view Apple stock as being undervalued in the backdrop of what they define as “stabilizing iPhone demand” and the company’s growing subscriber base. Apple stock is trading at 0.66 relative P/E compared to the S&P 500, compared to the five-year average ranging between 0.6% and 1.09%.
Mixed data on Apple’s iPhone sales
According to Longbow, Google Search trends pertaining to the iPhone 7 were solid last month, as they were about three times higher than searches for the iPhone 6s were in November 2015. This is similar to what the analysts observed in October.
Perhaps one of the problems for all the mixed information is consumers’ apparent preference for the iPhone 7 Plus over its smaller sibling. Apple’s suppliers have not yet been able to manufacture enough of the phablets to meet demand, according to Mizuho Securities analysts, so many consumers may be switching brands or simply waiting to buy an iPhone. This could explain why Google searches are higher than they were last year for the iPhone 6s, but Apple suppliers are not exactly rolling in orders.
iPhone 8 will drive Apple stock… for better or for worse
Most analysts are straining ahead to next year’s iPhone 8 in a manner similar to what they were doing a year ago with the iPhone 7. We heard recently that Apple will disappoint again in 2017 and release only an iPhone 7s and 7s Plus, contrary to all the build-up of reports from those expecting amazing things from the company next year. And yet, analysts are banking on there being an iPhone 8 that will knock everyone’s socks off. After all, there seems little else to hope for, so in order to sell Apple stock, analysts have to convince investors that the company has a bright future.
In a research note dated Dec. 13, Citi analyst Jim Suva offered five reasons they expect Apple stock to move higher in 2017. Naturally, the first one on the list is the “iPhone super upgrade cycle,” and they’re still predicting new form factors such as an OLED curved screen and new features like wireless charging. Of course there’s no denying that the iPhone 8 (or next year’s iPhones, whether they end up being only a 7s lineup) will be a catalyst for Apple stock. Either it will boost shares because the company will surprise everyone, or it will send shares into a downward spiral and analysts will again be saying, “Well, there’s always next year.”
Other reasons to like Apple stock
Citi analysts also note that Apple would benefit from President-elect Donald Trump’s planned tax reform, including lower corporate taxes and cash repatriation. Suva pegs Apple’s benefit at a 6% boost to earnings per share from an improved tax rate and a 10% increase to earnings per share from a cash repatriation holiday.
The analyst also note that the company has a sticky user base, which should also help it keep growing its services business, and he expects the company to keep striking new enterprise partnerships. And finally, he believes the valuation of Apple stock is “attractive,” as it trades at a “slight discount” to its four-year median multiples even though he expects the company’s fundamentals to improve in the future.
Shares of Apple stock rose by as much as 2.19% to $115.78 as investors bought into Citi’s arguments in favor of a better 2017.