Merrill Lynch: Apple shares have room to grow

In years like this one with a good iPhone launch, Apple has outperformed the market by 32%.

From a note to clients by analyst Wamsi Mohan that landed on my desktop Saturday: 

Focus on the relative, not the absolute. Recent investor conversations have focused on the significant outperformance of AAPL stock YTD 63% vs SPX Index up 23%. This has led to skepticism of incremental upside in shares of AAPL. Our analysis (Fig 1-3) suggests that if past cycles are any indicator, there is significant room for upside. We focus on Apple’s performance relative to SPX Index from an iPhone launch to the next iPhone launch given investors remain very focused on timing iPhone cycles (while the stock gets rerated for Services exposure)…

Cycle to cycle relative performance has actually lagged. Fig 3 shows that the relative performance of Apple shares have actually lagged (-6% absolute and -8% relative) into the iPhone 11 launch. We attribute this to the low expectations similar to the iPhone 5C/5S (down 25% absolute and down 41% relative) and iPhone 7 (down 2% absolute and down 8% relative) launches. However, the following cycles iPhone 6 (larger form factor), iPhone X (OLED) were cycles that drove significant outperformance on an absolute basis (54% and 48% respectively) and also on a relative basis (32.5% and 31% respectively). We expect material relative outperformance heading into the 5G cycle as well.

Apple merrill room grow

History favors owning Apple especially after a weak cycle. In cycles with positive returns, Apple shares have gained on average 47% on an absolute basis heading into product launches and 32% on a relative basis. In cycles with negative returns, Apple shares have declined on average 11% on an absolute basis heading into product launches and 20% on a relative basis. Given that we just completed a negative return cycle (-8% heading into launch of iPhone 11) and are heading into launch of a 5G phone (15% outperformance so far on absolute and 11% relative from iPhone 11 launch through Nov 11, 2019), we expect that the risk reward remains favorable despite the YTD performance.

Maintains Buy and $270 price target.

My take: History favors owning Apple, period.


  1. Jamie McDaniel said:
    “ …AAPL stock YTD 63%… This has led to skepticism of incremental upside in shares of AAPL.”

    AAPL dropped from $233.47 in the last 3 months of 2018 to $142 in the first month of 2019. That is a 39% drop. Just to get back to $233.47, a $142 stock has to ascend 64%. Cue all the hand wringing over too high a percentage increase for 2019!

    The market WAY overreacted negatively on AAPL at the end of last year. This return corrected that mistake at least. But there is still the business of valuing Apple at a proper PE – at a time when the company is at its strongest.

    November 10, 2019
    • Robert Paul Leitao said:

      I’m not interested in the trailing-twelve-months (ttm) earnings multiple. Net income growth and anticipated net income growth are the primary drivers of Apple’s share price appreciation. Additionally, Apple continues to reduce the fully diluted share count.

      Early indicators suggest Apple is entering a strong two-year iPhone upgrade cycle which will drive revenue, net income and earnings per share growth through FY2020 and FY2021 while Services and wearables revenue continue to rise at double-digit rates.

      Even if the forward multiple were to remain constant due to concerns over the pace of domestic and global economic growth, there’s plenty of room for share price appreciation. One potential positive over the next two years is the softening of the value of the dollar. That’s potentially an additional catalyst to drive recognized revenue and net income growth.

      in other words, if Apple is able to drive consecutive years of iPhone revenue growth (FY2020 and FY2021) the share price will take care of itself. At present, Apple remains underweight in most institutional portfolios.

      November 10, 2019
  2. victor castroll said:


    Let me ask you a question. And i’ll axed it in a nuanced fashion.

    Q: how does $ look if they can’t get a 5G phone out next year? #askingforafriend

    PT? Sub 220? 200? God forbid, $180?

    November 11, 2019

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