The single biggest headwind for Apple Inc. (AAPL) stock these days is less-than-spectacular demand for iPhones, and now that’s following through to Wall Street’s price targets on Apple stock.
On Monday, Pacific Crest Securities cut its target price on Apple stock after channel checks revealed “stable but soft” demand for iPhones. As such, Pacific Crest marked down its forecasts for iPhone shipments and sales in the second quarter.
The investment bank now sees unit sales coming in at 47.5 million in Q2. The prior outlook was for shipments of 49 million. Projected revenue was marked down to $50 billion from $51.3 billion, and earnings per share are now seen at $8.73 vs. $8.89.
After Pacific Crest ran the new numbers through its model, the target price for AAPL stock fell to $127 from $132. If you’re an AAPL bull, the only reasonable response to this is: So what? Even at $127, Apple stock still has implied upside of about 23% in the next 12 months or so. That’s a buy in any analyst’s book.
Indeed, Pacific Crest maintained its overweight (buy, essentially) rating on AAPL stock for reasons we’ve been citing all along: the iPhone 7.
Apple Stock Is a Screaming Buy
Yes, it could be a rough spring and summer while the market waits for the launch of the latest iteration of the iPhone. The iPhone 6s and iPhone 6s Plus were less popular than the year-ago models and now it appears that demand may be decelerating.
These worries have made the sentiment on AAPL stock pretty poor. Shares trade at just a bit more than 10 times forward earnings. You can find telecom and utilities stocks that are more expensive than that, and those investments are supposed to generate paltry growth.
Apparently, the market either expects Apple’s stock to keep tumbling for months, or it’s pessimistic about the hit potential of iPhone 7.
Whatever the reason, AAPL is still a buy at current levels. Indeed, its price-to-earnings ratio offers a steep discount to the S&P 500 despite having much better growth prospects. It’s also well below its own five-year average P/E.
But valuation will mean revert eventually, especially if the iPhone 7 is a typical success story. (If the iPhone 7 is a flop, it’s time to revisit the thesis on AAPL, but we’re not there yet.)
Besides, even the Street’s lowest price target anticipates nothing worse than flat performance for Apple stock over the next year. That equates to a hold rating. The average target implies upside of more than 30%.
This is what a cheap, high-quality stock looks like. By the way, Apple’s return on equity, which is used as a metric for quality, is nearly 43%. That’s huge.
Yes, more analysts will play with forecasts ahead of Q2 earnings, but none of it will change the thesis on AAPL stock. It’s a slam-dunk buy on valuation alone.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
