Spoiler alert: He doesn’t buy it.
From a note to Bernstein clients that landed on my desktop Thursday:
Apple’s stock has rerated over the last 2+ years from a below market multiple stock to one that is trading at a 24% premium. With consensus EPS expected to be largely flat next year, a key question among investors is “What is the bull case for AAPL from here?”
The bulls argue: (1) Apple is a leverageable consumer brand, that has and will continue to allow the company to take price and enter new categories (AR headsets, cars), as it has done with wearables; (2) Apple’s ecosystem/platform of 1.65B devices has ample room to be monetized with new services, including advertising, and possibly social media; and (3) gross margins should structurally increase as services become a higher part of the mix. The upshot is that Apple may be able to grow EPS at double digits and is effectively a quality compounder.
Given that we see limited opportunity for significant earnings upside in FY 22, we believe that near-to-medium term outperformance in AAPL’s stock would likely have to come from multiple expansion, which could occur if: (1) the iPhone 13 cycle is stronger than expected; (2) Apple were to set another explicit, ambitious services bogey (e.g., double revenues in the next four years); or (3) Apple were to begin offering its products as-a-service.
We believe that Apple’s valuation is relatively full today given the company is trading inline to higher than other FAAMG stocks (notably Google and Facebook), both of which not only have better expected growth, but also higher margins. Looked at another way, close to 100% of revenues from GOOG and FB have financial characteristics of Apple’s attractive Services business (which amounts 20% of AAPL’s revenues), yet AAPL trades at similar multiple to Google and at a premium to Facebook.
Maintains Market Perform rating and (soggy) $132 price target.
My take: I liked his version of the bull case. I should add that Sacconaghi has been wrong about Apple more often than not since 2008.
UPDATE: Eric Savitz at Barron’s take…