Can shares keep outperforming while trading at the high point of their five-year historical high?
Despite concerns earlier in the year about iPhone demand, Apple Inc. shares have rebounded nicely — so nicely, in fact, that the stock is now “as expensive as ever.”
That’s according to Bernstein analyst Toni Sacconaghi, who pointed out Thursday that Apple shares AAPL, -1.07% are currently trading at 17 times forward earnings estimates, in line with their historical five-year high. While such a multiple may be cheap for big tech, it’s fairly high for a hardware brand.
Sacconaghi has heard two potential explanations for Apple’s rising valuation: increasing belief that Apple shares should trade like those of a high-end consumer brand and a stronger focus on valuing Apple based on the sum of its parts, taking into account new disclosures and efforts concerning its services business.
“While we are constructive on the ‘consumer brand’ thesis, we remind investors that Apple remains a fairly cyclical stock with over half of its revenues derived from a single mature product, the iPhone,” he wrote. “Moreover, unlike luxury handbags, jewelry or even dish soap, the iPhone is inherently subject to replacement cycle, commoditization and disruption risk.”
Even Swiss watchmakers, in their luxury space, see their shares trading at 16 times to 19 times forward earnings, which doesn’t suggest too much room for Apple’s valuation to move higher even if investors begin to place the stock in the luxury camp.
In considering Apple on a sum-of-the-parts basis, Sacconaghi also doesn’t see “material upside” to its current valuation.
“While the company has done an excellent job of driving services [average revenue per user] growth recently,” even ascribing a 25 to 30 multiple to Apple’s services earnings requires a belief that Apple’s hardware business should trade at a multiple of 12 to 15 “with no conglomerate discount — which is relatively generous compared with other hardware companies that are challenged to grow,” he wrote.
Sacconaghi said it’s “certainly possible” that Apple shares could outperform in the near future, even as they trade at elevated levels relative to the company’s average. The big question is whether shares will “re-rate” higher in the long term, or come to be viewed by investors as worthy of a higher multiple.
That’s possible, too, in Sacconaghi’s view. Apple is “a relatively better business” than it was three years ago, he admitted, as the high-margin services segment grows to be a larger portion of overall revenue. If the replacement cycle for iPhones were to stabilize this year, the services line could become an even bigger contributor, helping Apple’s valuation.
But Sacconaghi isn’t quite sold. “On net, however, we continue to believe the risk-reward on Apple remains neutral today.”
He has a market perform rating and $190 price target on shares, which have risen 28% so far this year, as the Dow Jones Industrial Average DJIA, -0.54% has risen 11%. Apple is among the Dow’s 30 components.