Bernstein: Apple is not a Gucci crocodile bag

Apple is not like a purveyor of luxury handbags, jewelry or even dish soap, says analyst Toni Sacconaghi.

From a note to clients that landed on my desktop Thursday:

Following a rollercoaster 1H 2019, Apple has now climbed 43% from its trough in early January to trade at 17x consensus forward EPS, equivalent to its 5-year historical high. We generally hear two main arguments to justify this valuation: (1) that Apple’s stock should secularly re-rate to trade more like a high-end consumer brand; and (2) that Apple should be valued on a sum of the parts basis to reflect its growing Services business.

While we are constructive on the “consumer brand” thesis, we remind investors that Apple remains a fairly cyclical stock with over half of its revenues derived from a single mature product, the iPhone. Moreover, unlike luxury handbags, jewelry, or even dish soap, the iPhone is inherently subject to replacement cycle, commoditization, and disruption risk.

Our analysis suggests that a sum of the parts valuation does not necessarily point to material upside to Apple’s current valuation, either. While the company has done an excellent job of driving Services ARPU growth recently, even ascribing a 25-30x multiple to Apple’s Services earnings still requires one to believe that Apple’s standalone hardware business should trade at 12-15x earnings with no conglomerate discount – which is relatively generous compared with other hardware companies that are challenged to grow.

Could Apple nonetheless continue to outperform, despite its elevated valuation? It’s certainly possible. In the near-term, Apple’s recent outperformance likely reflects the investor belief that FY19 numbers have been “de-risked,” and we see little that might reverse this sentiment. Medium to long-term, the possibility exists that FY19 represents a near term “trough” in the iPhone business, at which point we could be approaching an inflection in hardware vs. services profitability mix (currently 69% / 31%), pointing to a modestly higher “sustainable” valuation over time. On net, however, we continue to believe the risk-reward on Apple remains neutral today.

Maintains Neutral rating and (underwater) $190 price target.

bernstein apple too expensive

My take: Toni Sacconaghi is not a friend of the Apple investor.

10 Comments

  1. Aaron Belich said:

    Does not compute:

    “Moreover, unlike luxury handbags, jewelry, or even dish soap, the iPhone is inherently subject to replacement cycle, commoditization, and disruption risk.”

    Those three things are all at risk of disruption, replacement, and commoditization. Oh wait, all of those things have happened to those products.

    This note is not for anyone with a critical eye or half of a human brain?

    1
    May 9, 2019
  2. Aaron Belich said:

    Also, what is that chart supposed to mean?

    The second most shorted and misreported company in the last two decades shows that’s its been abused in the last 5 years?

    Thanks for the reminder that Tony’s analysis isn’t worth paying for. If it wasn’t for the buy-backs we’d be at $37/share.

    1
    May 9, 2019
    • Alan Birnbaum said:

      And we would have over 6 Billion shares outstanding

      ( Apple shares outstanding for the quarter ending March 31, 2019 were 4.701B, a 7.26% decline year-over-year.
      Apple 2018 shares outstanding were 5B, a 4.79% decline from 2017.
      Apple 2017 shares outstanding were 5.252B, a 4.52% decline from 2016.
      Apple 2016 shares outstanding were 5.5B, a 5.05% decline from 2015.)

      0
      May 9, 2019
  3. Michael Thompson said:

    Corrupt Toni Sacconaghi is a friend of market manipulators and other criminal swine on Wall Street.

    2
    May 9, 2019
    • Alan Birnbaum said:

      He is giving swine a bad name !!

      1
      May 9, 2019
  4. Fred Stein said:

    Ah, Toni, I’m channeling my inner freakeconmics genie.

    Yes, Apple’s P/E is high compared to the last five year average. But look at the times when AAPL was well below that 13.68 P/E average, mainly Aug ’15 to Jan ’17. The stock was trading below $121 averaging well below $121, a solid bargain even compared to Toni’s $190 target. The historical data only proves that the market gets it wrong, overly discounting AAPL. Not news. Not a good predictor of future stock price.

    As for comparison to Veblen goods. YES ! Apple’s products are not Veblen. The Veblen goods he cites have higher grown margins, which they require to sustain much higher SG&A vs. Apple. Without those heavy ad budgets, the Veblen’s die. Investors, let’s rejoice that Apple is not slave to ad campaigns.

    And communization etc.? Apple’s gross margins have been pretty steady for a decade. The only exception was one year with they averaged in the mid 40%. Predictably the market freaked out when GMs returned to 37% to 38% range. The Mac was OPD two decades ago. It’s still a great business, which has grown tremendously since those days.It’s fine that SmartPhones are mature. This hurts Android more that iOS. Plus iOS is way ahead in wearables, where Apple Watch faces only fragmented niche competitors, and where AirPods have really no competitors.

    5
    May 9, 2019
  5. Jamie McDaniel said:

    And from the CNBC article today by Thomas Franck:

    ——————
    In a note to clients Thursday, Bernstein’s Toni Sacconaghi pointed to the stock’s 17 times forward price-earnings ratio.

    “Apple is now as expensive as it’s ever been since 2012, when it exited its hyper-growth stage amid the early years of the iPhone,” he wrote.

    Sacconaghi, rated consistently the No.1 Apple analyst by Institutional Investor magazine, has a market perform rating and $190 target price.
    ——————

    How I’d love to see instead:
    Sacconaghi, who has a poor track record as an Apple analyst and has consistently ranked near the bottom since 2012, has a market perform rating and $190 target price.

    6
    May 9, 2019

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