Now that the 5G iPhone event is over and Apple (AAPL) has officially launched the new lineup of high-speed phones, investors can get back to valuing the stock without the hype. My previous warnings had informed investors on the likely stock peak after the stock split back on August 1 followed by some 5G hype. My investment thesis is now more Neutral on the stock in the short term as Apple still has a rich valuation up here near $120.
Image Source: Apple website
A lot of consumers have waited to purchase new iPhones until the 5G iPhone was launched. On October 13, Apple officially launched 5G capability with the iPhone 12, but U.S. consumers will unlikely see significant benefits with limited 5G networks available now causing most tech journalists to have tepid views on the phone.
CNET even wrote an article with advice on waiting for the iPhone 12 release in order to get previous iPhones at lower prices:
Even if you aren’t intending to buy an iPhone 12, it’s a good idea to delay the purchase of a new iPhone. New iPhones mean that there will be discounts and clearance prices on old models and if you time it right, you could actually score a pretty good deal.
The iPhone 12 offers a 50% faster A14 Bionic chip and several other key features users will enjoy more until the domestic wireless market offers full 5G networks. The new phones come with a ceramic shield to greatly reduce cracks from falls and MagSafe technology to improve wireless charging connections. The Lidar function on the iPhone 12 Pro versions will enhance photos and more importantly open up more augmented reality functions.
My prediction remains that early adopters will rush out to purchase these phones for 5G connectivity and of course people reaching natural upgrade cycles will jump on the newest phones. Unfortunately for investors, the upgrade cycle isn’t likely to speed up as consumers realize that most 5G networks are built on mmWave technology requiring close proximity to a 5G tower, which typically is only in downtown areas now.
Even AT&T (T) Communications CEO Jeff McElfresh warned that the launch of a 5G iPhone won’t be a “massive event.” The end result are sales that pop in the December quarter likely followed by sales fizzling out by the June quarter.
Most analysts appear very bullish on the iPhone upgrade cycle due to 5G. Katy Huberty sees the 5G iPhone launch as the most significant phone launch in years with the potential for Apple shipping 220 million units in FY21.
Loup Ventures predicts iPhone units sold will surge 15% in FY21 as up to 90 million units in use are now older than three years. The firm is more in line with the general analyst community while Huberty from Morgan Stanley (NYSE:MS) is not surprisingly more bullish than most.
Of course, part of the upside in the current fiscal year is from weak numbers in the just ended FY19. March quarter sales were down over $2 billion from FY19 levels, but Apple did end FQ3 with iPhone sales up $2.3 billion from the same period in FY19.
With analysts forecasting flat total sales for FQ4 that ended in September, iPhone sales will end down for the quarter and flat for the year due to the Services growth. The analyst community now appears aggressive on FY21 total sales ramping up 12.5% for the year, in part due to the weakness in FY20.
The iPhone didn’t exactly have a bad year despite the COVID-19 hit to the global economy. Even with Services growing at a 15% annual clip, analysts are relying on substantial product sales growth via both the iPhone and Mac in order to achieve total growth at this pace. Services are likely to only contribute $8 billion of the sales growth in FY21 with the rest of the forecasted $36 billion in growth coming from Products such as iPhone and Wearables.
While the analyst community appears more bullish on the 5G iPhone launch, analysts really aren’t that bullish on the stock. The average price target is only $122 or basically in line with where the stock traded during the week of the event.
Source: Seeking Alpha Wall St. Analyst Ratings
With analysts entering the year with a price target on Apple closer to $66, one can’t really blame the group for only having tentatively bullish calls. Even Katy Huberty only has a $130 target on the stock or the equivalent of 32.5x her $4 EPS target.
While investors still appear bullish on Apple, the stock just isn’t likely to run much past the current levels. The stock trades at 29x forward EPS estimates and is generally more expensive than other mega tech stocks with faster growth rates. Facebook (FB), Microsoft (MSFT) and Alphabet (GOOGL) (NASDAQ:GOOG) are all forecast to generate double-digit growth in FY22 while Apple analysts expect CEO Cook to struggle with 5% growth after the 5G hype cycle peaks.
The key investor takeaway is that analysts appear too bullish on the upside potential from the 5G iPhone. Even if Apple manages to top 12.5% sales growth this fiscal year, the company is unlikely to maintain strong growth next year. If this analyst community can’t come up with a meaningfully higher price target on an already expensive stock, investors need to pay attention.
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Disclosure: I am/we are long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.
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