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Point/Counterpoint: As Apple Nears $2 Trillion Value, Just Right or Too Hot?

Published 08/07/2020, 04:33 PM
Updated 08/08/2020, 06:46 AM
© Reuters.

By Liz Moyer and Yasin Ebrahim

Investing.com -- Strange times have set in on Wall Street. . . Valuations appear to have been banished. "Buy the dips" are in. And if all else fails, the "Fed has your back," has been running narrative among investors both new and old.

The remarkable rise in Apple's (NASDAQ:AAPL) valuation, however, supports calls to at least give a cursory nod to the possibility that the tech giant is running too hot.

Apple's market value stood at $999.5 billion a little under five months ago on Mar. 16, and now is on the cusp of more than doubling. The shares trade near $445, driven by investors who see pent up demand for upcoming device upgrades and strong sales despite pandemic lockdowns. A plan to split the stock 4-to-1 could propel Apple's market value above the $2 trillion mark.

Investing.com's Liz Moyer writes about the bull case for Apple, while Yasin Ebrahim explains how Apple is running too hot. This is Point/Counterpoint.

The Bull Case

A bet on Apple is a bet on the roll out of the next generation network, 5G. Apple is planning to introduce 5G devices in the coming months. That should certainly appeal to need-it-first consumers, who will undoubtedly race to snap up new iPhones.

Pent up interest in the iPhone 12 sets the stage, according to Wedbush analyst Dan Ives, in a note last month in which he set a new price target for Apple shares around $450. It has already approached that loftier level. 

Covid-19 lockdowns around the world threatened to dampen Apple's prospects, but things rebounded after the lockdowns lifted, especially in China's massive consumer market. The supply chain troubles also loosened up, allowing Apple to move ahead with the 5G handset rollout.

Apple plans to offer multiple versions that will run on 5G chips. That will inevitably push Apple's market value above $2 trillion, as "given the 5G tailwinds and services momentum potential over the coming years," Ives wrote in a note. He estimated that roughly 350 million of some 950 million iPhones out in the world are due for an upgrade.

Morgan Stanley recently called out Apple's trade-in programs as a competitive advantage, saying they can fund one-third of iPhone purchases over the next three years.

Apple's market value topped $1 trillion in market cap for the first time in 2018, faltered a bit and then surged again last year. Its remarkable near-doubling since then has also made it the heftiest stock in the S&P 500. At $450 a share, with a market value of $1.925 trillion, Apple is now 6.7% of the index, compared with 6.4% for IBM (NYSE:IBM) some 35 years ago, according to data compiled by Bloomberg and S&P Dow Jones Indices.

Microsoft (NASDAQ:MSFT) is 5.9% of the S&P and Amazon (NASDAQ:AMZN) is 4.9%.

The stock is up another 53% this year, the most of the biggest big-cap stocks except for Amazon. Consumers are still buying iPhones, iPads and computers even though they have been hunkered down at home to avoid spreading the virus. The shares hit a fresh 52-week high this week.

D.A. Davidson analyst Tom Forte recently set a price target for the stock of $480, which implies a market value overall of $2.05 trillion.

Third fiscal quarter earnings topped estimates by 54 cents, with earnings per share of $2.58 rising from $2.18 a year ago on revenue of $59.7 billion. Revenue is up 10.9% over last year. With $33 billion of cash on its books, Apple has plenty of room to return money to shareholders.

But perhaps the best argument in favor of Apple longs is the company's plan to split 4-for-1 later this month.

That will make the stock more accessible to new investors, especially those who found $450 or so a share an unacceptably high entry price for a single share. Apple has split in the past, most recently a 7-for-1 split in June 2014. Back then, shares traded at $93.70.

The Bear Case

While an upbeat second-quarter report and the upcoming launch its 5G-enabled iPhones justify some of the froth in the tech giant's valuation, some have questioned whether the fundamentals of Apple's  business have changed materially in last five months to add a nearly $1 trillion to its value.

Bank of America analyst Wamsi Mohan doesn't think so.

Earlier this week, Mohan cut his rating on the Apple to neutral from buy, citing a more balanced risk-to-reward profile for the stock as it traded at its highest premium to the S&P 500 in 10 years.

Mohan brandished a laundry list of headwinds facing the stock including a risk to margins, regulatory uncertainty, and slowing services growth.

The launch of 5G handsets is not the panacea that many believe it will be. 5G iPhones will be more expensive to make - relative to a 4G handset – and eat into Apple's margin. While any attempt to plug the gap by raising iPhone prices will likely hurt volumes, Mohan said.

The regulatory scrutiny and developer backlash over Apple's antitrust practices in its App Store is also cause for concern.

The App Store, which is a key part of Apple's push into services as it seeks to wean itself off from iPhone dependency, is unlikely to continue its strong yet "unsustainable" growth next year, Mohan added. 

While there aren't many on Wall Street willing to jump off the Apple optimism bandwagon, BofA's Mohan is not alone following his shift to the side lines.

Goldman Sachs recently urged investors to "avoid" Apple's stock, citing uncertainty over the timing of the 5G launch and a somewhat murky outlook ahead.

"(W)e see Apple's recent stock performance and absolute trading level as unsustainable and would continue to recommend that investors avoid the stock," Goldman Sachs said in a note last month as the bank reiterated its sell rating on Apple.

The Wall Street bank estimated that 2021 EPS will be 16% below consensus amid pressure from slowing unit sales, average selling prices, and unit growth.

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