Analyst: The case against Apple as Coca Cola

With a below-market price target of $200, Bernstein analyst Toni Sacconaghi argues for paying less for Apple than, say, Nike or Louis Vuitton.

From Should Apple be valued like a consumer brand?, a note to clients that landed on my desk today, a day late:

Having recently become the first trillion-dollar company in history, Apple now trades at 17x consensus forward EPS, the highest multiple that the stock has enjoyed in over half a decade. We believe this reflects improved investor sentiment after a better-than-expected Q3, which may have given new life to a longstanding bull case – that Apple’s stock can secularly re-rate to trade more like a high-end consumer brand rather than a traditional tech hardware OEM.

On the one hand, it is not necessarily far-fetched to argue that Apple could be valued more like a consumer brand a la Coca-Cola, Estee Lauder, Nike, or Louis Vuitton, all of which command P/FE multiples ~20% higher than Apple’s valuation today. Like many consumer brands, Apple enjoys remarkable customer loyalty, high ROICs, and relatively stable cash flows (particularly as the company expands its recurring revenue streams from Services).

That said, we see some shortfalls in the comparison. Consumer brands typically have very resilient revenues and free cash flow, driven by timeless products that do not go obsolete; as a result, we rarely see steep revenue declines for consumer brands over the long-term. In contrast, the vast majority of Apple’s revenues are derived either directly or indirectly from the iPhone, which – like all tech hardware – is fundamentally subject to replacement cycle elongation, commoditization, and/or outright disruption.

On net, we believe that Apple’s persistent valuation discount to top consumer brands is likely warranted, although the magnitude of the discount is debatable. For the stock to re-rate to the level of a top consumer brand, we would likely need to see the company migrate its current transactional selling model to a subscription-based model.

Maintains Market Perform rating and $200 price target.

My take: Sacconaghi writes in conclusion that he sees the risk-reward on AAPL as “favorable” in the near-term, but his price target says Apple at $228 is in nose-bleed territory, headed for a fall.

Below: Apple’s PE over the past five years.

sacconaghi apple not coca cola

Click to enlarge. 

14 Comments

  1. Gregg Thurman said:
    The difference Sacconaghi sees between Coca-Cola et al (high forward PEs) and Apple is predictable and stable, revenue/cash flow growth.

    Of course, that predictability comes at the expense of low revenue growth rates. Yes, it has revenue swings, but averaged out over a number (FY2006* to present) of years Apple’s revenue growth dwarfs that of Coca-Cola, Estee Lauder, Nike, or Louis Vuitton at 27+%.

    Sacconaghi is punishing AAPL for three of those thirteen years (FY2013, FY2014, FY2016) that Saw revenue grow an average of 2.81%.

    *FY2006 is as far back as my YoY revenue comparison chart goes. Be that as it may, the period remains a hefty 13 years.

    From Sacconaghi’s “research” note it’s clear he still considers Apple an iPhone company and is giving little weight to Services and Other products and prospects for growth with what we already know is coming down the pipeline. He is mired in a past that doesn’t exist anymore.

    With his sense of value, he would never make the investment in Apple/AAPL that Buffett continues to make and would never advise his clients to do so either. Pity.

    3
    September 5, 2018
    • Michael Thompson said:
      Apple has MUCH more revenue and significantly more net profit than Coca Cola, Estée Lauder, Nike and Louis Vuitton’s parent company added together.

      “Apple’s #1 Analyst” is butt hurt because he’s been so wrong for so long. And it appears that he’s doubling down on his wrongness.

      Wrong Way Toni has been proclaiming for 4 years that “Apple’s best days are behind it”. Tim must take special pleasure in repeatedly proving the negative nancies wrong.

      1
      September 5, 2018
  2. Gregg Thurman said:
    I broke the 41 “analyst” price targets I track into 3 groups: underwater (does not include 4 perma bears), October earnings, and January earnings. Doing so resulted in the following results.

    Underwater: 27 – Consensus $201
    October Earnings: 7 – Consensus $234
    January Earnings: 4 – Consensus $255

    Here’s an interesting observation for January options expiry, Open Interest is highest (33,159) at the $250 Strike with a Bid/Ask of $5.40/$5.50 implying (in my opinion) an Investor target of $260.

    Sacconaghi’s “analysis and price target” of $200 is below the Underwater consensus and woefully below that of implied Investor target.

    3
    September 5, 2018
  3. George Ewonus said:
    Seems like Toni sees the landscape like a horse with blinders. How about the PE’s of Microsoft, Google, heaven forbid Amazon? Yes, Apple is continuing to build its subscription model, but hardware is not a weakness. One of Apple’s strengths is that it also controls the hardware side. Ask Microsoft how well it is doing in the mobile space? Evidently the majority (79%?) of all mobile activity for business happens on iOS. Be interesting to see a comparison of free cash flows of Apple and the brands Toni mentions. Of course Apple could decline at any time. I just don’t buy Toni’s analysis.

    3
    September 5, 2018
    • Gregg Thurman said:
      Ask Microsoft how well it is doing in the mobile space?

      Ask Sacconaghi how well MSFT is doing in computers. It wasn’t that long ago that Macs in the enterprise were limited to brochure development.

      Today’s OS shares in the enterprise are as follows:

      Windows 91%
      MacOS 9%

      With IBM, SAP, CISCO (and other similarly positioned global enterprise service companies) partnerships, MacOS share in the enterprise is going to continue expanding.

      I see MacOS enterprise share exceeding 11% in the next 5 years. After that, with many, many business cases being made that Macs are less expensive to operate and increase employee productivity, I see enterprise MacOS share growing at an accelerated rate.

      1
      September 5, 2018
    • Fred Stein said:
      Perfect. I think Toni suffers from confirmation bias. He cannot accept Apple’s strength. He creates a convoluted rationale for under water PT..

      0
      September 5, 2018
  4. Fred Stein said:
    Basic arithmetic: At Toni’s target, $200, Apple has a forward P/E of about 14.8, not 17. Factor in buybacks, 10% near term, it’s close to 13.

    Getting slightly subtle, the chart shows average P/FE since mid 2013. For most of that time, foreign earning, about 50% of total earnings, were taxed at net 40% or more. Hence for most of the historical data, the market logically discounted earnings by 20% (1/2 of 40%).

    Comparing to Apple’s past P/FE nor Coke’s current P/FE helps. Apple’s 6% and growing forward earnings beats just about anything.

    4
    September 5, 2018
  5. David Emery said:
    Gee, how long does Toni expect a can of Coke to last?

    Consumer products are most definitely -not durable goods-, they’re on short replenishment cycles, and brand loyalty is a key component of keeping customers coming back. The basic argument does not hold water (or Coke.)

    4
    September 5, 2018
    • Michael Thompson said:
      One other small detail, KO has had declining revenue for years. In 2013, KO had $46 billion in revenue. By 2017, their revenue had fallen to $35 billion.

      According to Sacconaghi Arithmetic, KO deserves a higher valuation than the world’s best and most profitable company.

      In order to make money in the markets, avoid using Sacconaghi Arithmetic. You’d be far better off using Maestri Mathematics.

      2
      September 5, 2018
    • David Emery said:
      Oh, and name -1 consumer product- sold on a “subscription model.”

      0
      September 5, 2018
  6. Fred Stein said:
    More on comparing Apple to Coke: They have grown very well over the last few years by acquisitions. They have nearly tripled their top line since 2014. But they have negative tangible assets as a result. That makes them fragile in a downturn or if interest rates rise or if they don’t achieve organic growth of the assets they acquire. See Forbes

    https://www.forbes.com/sites/garystern/2018/09/04/whats-driving-coca-colas-recent-acquisitions/#690c24f5202a

    Relating to Toni: Many of Coke’s acquisitions are brands, not “Coke”. So Coke, the company is no longer Coke the brand.

    1
    September 5, 2018
    • Gregg Thurman said:
      Don’t know where else to post this.

      https://www.investors.com/news/technology/click/apple-stock-iphones-bigger-screens/

      “Apple Streaming Video Service Taking Shape

      Morgan Stanley analyst Katy Huberty sees great potential for Apple’s planned streaming video service. She noted that Apple is spending about $1 billion on video content for the service this year alone. It has procured 24 new shows and forged content partnerships with the likes of Steven Spielberg, Oprah Winfrey and Sesame Workshop.

      If Apple were to launch its service at $7.99 a month, it could reach over 50 million paid subscribers by 2025, she said. Huberty thinks Apple will price its service below competitors such as Netflix (NFLX).

      Apple could decide to bundle its video service with its streaming music offering, Apple Music, and digital news and magazine subscription service, Texture, and charge $12.99 a month, she said. Huberty called the bundle the “Apple Media” service.

      “From a financial perspective, we believe there is clear reasoning as to why Apple would pursue the Apple Media bundle,” she said. “However, we believe the most likely option will be a combination of both — i.e. offer Apple Video as a $7.99/month stand-alone option but also offer the Apple Media bundle for $12.99/month.”

      I used to like Katy’s analysis, but of late (last 2 – 3 years) she seems to have gone awry.

      Case in point: when has Apple ever offered a product or service that was priced below the competition? I think her pricing models are way out of whack with what Apple will most likely do, that is, continue Apple Music at $9.99/per month, offer Apple Streaming Video at $12.99/month and a bundle (including Apple News) for $19.99/month.

      HBO, the people that started movie production outside of Hollywood, charges $20/month for its service alone.

      Neither Netflix, Spotify, Google or Hulu (all comprised primarily of Android subscribers) can match these offerings, so why undercut the competition?

      Katy also speculates that a music/video bundle would generate 50 million subscriptions by 2025. Hell, Apple Music has >35 million subscribers right now and is growing like a weed without streaming video. Another 15 – 20 million subscribers over the course of another 7 years (with a price reduction) is just pathetic.

      0
      September 5, 2018

Leave a Reply