Apple Inc. (AAPL): Goldman Sachs Cut STILL Means 25%-Plus Upside for Apple Stock

Goldman Sachs sliced its price target for Apple Inc. (NASDAQ:AAPL) on Thursday, but the takeaway shouldn’t be the number — it should be the fact that the investment bank still sees enough upside ahead to maintain its buy rating on AAPL stock.

Apple Inc. (NASDAQ:AAPL): Goldman Sachs Sees More Than 25% Upside

Analysts reduced their target price on Apple stock to $124 from $136, citing lower growth forecasts for the smartphone industry. Given a saturated marketplace, Goldman Sachs expects global smartphone unit growth of just 5% to 6% this year, down from a prior outlook if 4% to 7%.

AAPL, in particular, has been hurt by sluggish demand in the product category. Indeed, a disappointing response to its most recent refresh led Apple to experience the first ever decline in iPhone sales — a headwind that will hurt AAPL stock for the remainder of the year, if not beyond.

However, that doesn’t mean Apple stock has no value at current levels. Far from it.

Goldman Sachs still expects tremendous upside even after the tweaks to its model spit out a lower price target. At $124 a share, AAPL still has implied upside of 27% in the next 12 months or so.

Let that sink in. 27%.

In other words, this latest bit of research from Goldman Sachs, while not the most positive news shareholders could’ve received, is hardly a slam against Apple stock.

To be sure, risks (as always) remain when it comes to hitting such a lofty target. Average selling prices — and therefore margins — are under pressure as expansion in developing markets leads to cheaper iPhone models taking up more of the sales mix.

And speaking of developing markets, China was once a main driver of growth, but sales are down 26% in the region, hurt by economic weakness and AAPL’s failure to deliver a hit product at the end of last year.

Sentiment Is Too Low on AAPL Stock

Despite all this, Goldman Sachs is confident in its expected upside because it looks like the rest of Wall Street is too pessimistic. From the analysts:

“We continue to view consensus estimates for (full year 2017) as too low, as we expect an increase in upgrades with the iPhone 7 based on the pent-up demand evident in our recent U.S. consumer survey, combined with our estimate of 26 percent year-on-year growth in the iPhone installed base as of September 2016.”

If the Street’s average estimate is too modest and AAPL manages to surprise to the upside as GS reckons, that means Apple stock is overly discounted at current levels.

Heck, it certainly looks that way just by some basic valuation metrics.

AAPL stock currently changes hands at less than 11 times forward earnings. Apple has become priced like a low-growth cash cow. Fair enough. But entire sectors of low-growth cash cows — utilities and telecommunications stocks, for example — get higher multiples than that.

More to the point, see if you can find a utility stock or telco with a long-term growth rate of almost 10%. Apple has that.

Apple may have indeed lost its iPhone mojo, but given rumors that it’s pursuing an incremental refresh strategy with iPhone 7, we might not know for sure until the fall of 2017.

But even if it has, so what? Even as a plodding dividend payer, AAPL stock is on sale.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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