Hot Stock: Apple

Price drop a buy signal?


If there’s one stock you don’t want to bring up with your investing friends these days, it’s Apple (NASDAQ: AAPL). It’s likely more than a few of them will be frustrated by the computer company’s recent performance, while others may be wishing they sold the stock back on September 21, when it peaked at $700. Since that day, its price has tumbled to about $390 and Apple has left investors wondering if they should stay away or take advantage of the lower price.

The majority of analysts take the latter view, with 80% saying to buy, 15% saying to hold and just 5% saying to sell. Price targets differ significantly, but most expect the stock will climb back up to between $530 and $600 over the next 12 months.

Part of the reason for the optimism is that this stock is now incredibly cheap, trading at about 9 times earnings. Edward Parker, an analyst at Lazard Capital Markets says those valuations suggest that any negative sentiment is now priced into the stock. “We believe the market already seems to be discounting an appropriate level of margin erosion risk,” he wrote in an April 17 note.

There will be bumps in the short-term, but it’s still got a lot of long-term potential. The company is releasing its quarterly results on April 23 and Parker thinks demand for the iPhone and iPad will be soft. But he also says that Apple is becoming more of a “storage” company—people are storing data on devices and in the cloud—and that part of the business has attractive margins of between 35% and 40%.

Toni Sacconaghi, an analyst with Bernstein Research who has a buy rating on the stock, thinks quarterly results will be mixed too. He says the company will sell about 1 million less iPhones and 1 million less iPads that he had originally predicted. He also doesn’t think Apple will announce any dividend policy increases during its quarterly report, though that could come later.

However, it is succeeding in improving its cost curve for the iPhone; it has high data storage prices and strong iPad mini sales. He also thinks it can continue to innovate.

“While we believe that Apple’s stock could continue to be choppy through earnings, we maintain that Apple offers an attractive combination of a powerful consumer franchise, option value from new products and a compelling valuation,” he wrote in April 17 note. He has a price target of $725 on the stock.

Parker, who has a $540 price target on the stock, says “it’s time to revisit what makes Apple unique. “We propose that Apple is a ‘storage’ company, not only levered to data creation but instrumental in driving data creation in ways its competitors are not. We believe this framework helps to suggest why Apple’s outsized profits are sustainable even as competitors continue to close the gap with respect to device capability and quality.”

While it may no longer be the only innovative company out there, with cheap valuations and a still dedicated consumer base, there’s a good chance this stock will rebound.

For more investing insights, follow Bryan on Twitter @bborzyko.


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