Toni Sacconaghi asks: What’s Apple’s bull case?

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…

Apple Stock Could Struggle. This Analyst Explains Why.

22 Comments

  1. David Emery said:
    It’s incredible to me that Toni misses SO MUCH and still has a job. This demonstrates he could do the analysis, it’s his “belief and bias” that is the problem. But since ANALysts are supposed to be paid for being -right- in those ‘beliefs and biases’, his track record of failure is truly puzzling.

    4
    October 7, 2021
    • Gregg Thurman said:
      With consensus EPS expected to be largely flat next year

      Like Saccocrap, when has consensus been right about anything re: Apple?

      Basing an argument on consensus estimates is just plain lazy.

      4
      October 7, 2021
  2. Jeff Galanti said:
    Part of me feels like the only reason he gets so much attention is because he has an interesting name. If he were just Bob Smith, the incompetent analyst, networks’ interest in him would ebb.

    4
    October 7, 2021
  3. Alessandro Luethi said:
    GOOG and FB may have financial advantages in 100% of their revenues over AAPL. What they don’t have is AAPL’s trust and ethics. And that constitutes a significant risk to 100% of their revenues!

    11
    October 7, 2021
  4. Ralph McDarmont said:
    What a clown. I agree he is delusional and should be dumped.

    2
    October 7, 2021
  5. Michael Goldfeder said:
    He’s probably been this way since he was a baby trying to figure out you can’t put a square peg into a round hole.

    Same issue decades later.

    4
    October 7, 2021
  6. Daniel Epstein said:
    This comment I quote below from Toni C tells me he still thinks Apple should always be under valued. That rerating really bugs him. I guess Apple has been performing poorly as a company and should be thought of as a below market performer! Not what I see when I look at the charts. Many companies would love to have Apple’s performance the last few years! And would love to have going forward.
    “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.”
    And in his opinion if Apple grows at all it should not be rewarded as a premium company as it had below market multiples in its history. Circular reasoning from a broken clock viewpoint. Maybe he was wrong in the past and is likely wrong now.

    5
    October 7, 2021
  7. Dan Scropos said:
    There’s no scenario where Apple doesn’t print at least $6.50 in eps in 2022.

    1
    October 7, 2021
  8. Bart Yee said:
    Here are the actual valuation PE numbers:
    AAPL
    Trailing P/E 28.05
    Forward P/E 25.2

    FB
    Trailing P/E 24.45
    Forward P/E 20.5

    Google
    Trailing P/E 30.20
    Forward P/E 26.2

    There’s nothing absurd about any of these valuations IF you believe the “consensus” numbers. Apple’s PE is below Google’s numbers even though the same threats to Apple’s App Store exist for the Google Play store to a significant degree. I suspect Facebooks PE is going to tumble because consensus believes FB has better prospects at growing earnings at a higher rate than Apple or Google. Apple earnings will spike for FY2021 but will grow at a more normalized pace from FY2022 – what is so bad about that except for “bad compares” with exceptional quarters due to the pandemic?

    My opinion is Toni keeps trying to conflate and compare Apple with fundamentally different companies like Google and Facebook who have vastly different revenue mechanisms and income streams. Key to this also are these two assumptions and assertions about Apple:

    “With consensus EPS expected to be largely flat next year” and “Given that we see limited opportunity for significant earnings upside in FY 22”.

    Even given an eventual pandemic resolution in 9-12-18 months, Apple, IMO is not going to see a flattening or notable reduction in OVERALL REVENUE.

    The erroneous belief that somehow Apple isn’t going to innovate existing products, add new products in existing or new markets, and continue growing Services is just laughable. Apple has proven, absent major external events like the FG China Trade War, to continue growing installed base, literally having a growing 250M+ base of 3+ year old iPhone current user upgrade cohort plus switchers and new users.

    I strongly believe the long game Apple is playing for the China and Rest of Asia (including the fledgling but soon to be rapidly growing India market) is already seeing fruition and will continue over the next 5-10 years as global economies stabilize and continue their growth recovery. Apple’s prospects in the US, Japan, and the EU have never been better. The regional inflation fears, regulatory issues, and semiconductor supply problems will play out and Apple will weather all of them – because at the root of it, Apple has superior supply chain management and their products provide what users want, desire, and will purchase, in exchange for superior user experience and privacy/safety, product support and reliability/longevity – all value prospects for users, translating into value for the company and its investors.

    Rosy, sure. Unrealistic, absolutely not, especially when looking at Apple’s track record. Never bet against Apple long term.

    4
    October 7, 2021
    • Dan Scropos said:
      How can a forward P/E be factual? I have it today at ~21.5.

      1
      October 7, 2021
      • Horace Dediu said:
        Forward P/Es are complete guesswork and have no relationships with what actually happens. Don’t forget that most analysts are unable to provide accuracy about the near past (last 3 months, with company guidance to boot). Asking accuracy about 12 months into the future is futile.

        7
        October 8, 2021
  9. Jerry Doyle said:
    It’s all very well for us to laugh over Toni, but actually we have to remember all the time that he really is one of the two most dangerous analysts on WS. We can’t regard him as somewhat of a freak, since he conducts himself appropriately and CNBC frequently trots him out as the number one WS analyst; and that being on Apple, too. It makes no sense. Then Toni starts spouting his message. As he talks, it is as if he is beginning to be convinced by the illogic of his own words. Toni just feels ever more strongly the urge to spread his gospel about Apple. It’s always the same tired old message. Irrespective, there seems to be a wide audience that follows him. I’m entranced by it all. PED should trot him before this group and let the good man attempt to work his magic.

    1
    October 7, 2021
    • Robert Stack said:
      Interesting perspective Jerry.

      Sort of like the Rolling Stones “Sympathy for the Devil”…at least he’s a devil to some on this blog. And that’s OK. But I do think it’s important for PED go bring his perspective to this forum precisely because he is frequently trotted out on CNBC and thus his opinion matters.

      0
      October 7, 2021
  10. Horace Dediu said:
    That is not the bull argument at all. The bull argument is that Apple has gone from 50 million customers to 1 billion and can go to 1.5b at least. The bull argument is that it went from 1 sale per customer every 5 years to one sale per customer every 5 days (including subscriptions). The bull argument is that it went from 1 product (the Mac) to a dozen each of which sells more than the Mac ever did. The bull case is that Apple commands a $2 trillion economy, larger than all but 6 countries. The bull case is that Apple creates value at an accelerated rate and is diversified into new markets such as health care, communications, enterprise and, soon, transportation.

    These are not wishful thinking or dreams of a distant future but connect-the-dots ramps that easily extrapolated.

    Comparison to itself (i.e. historic P/E ratio) assumes that Apple should be perpetually discounted to the S&P when there was no logic that it should be discounted at all; quite the contrary–as it outperformed the S&P consistently for a decade. Comparison to peers which are not diversified and are subject to systemic business model vulnerabilities due to surveillance toxicity is puerile.

    15
    October 8, 2021
    • Miguel Ancira said:
      And this, I believe, is exactly why you cannot value the company in traditional terms…I believe we are going to see the company grow to levels never before imagined.

      2
      October 8, 2021
    • Jonny T said:
      Thank goodness, Horace to the rescue. Thank you buddy!

      And as for Tony S, he’s just never forgiven Apple for never making his beloved Apple TV for which he would have got full credit.

      0
      October 8, 2021
      • David Drinkwater said:
        Do you potentially intend Gene Munster, who, while much more correct about Apple that Toni in general, was quite incorrect (thus far) about a full-sized Apple TV display panel.

        (I honestly don’t think a full-sized TV display panel or a full-fledged car are good business models for Apple. I think suppling UX and OS support for those devices is a sure-fire winner for Apple.)

        1
        October 9, 2021
    • Kirk DeBernardi said:
      @ Horace Dediu —

      Bravo. Thanks for providing Apple’s true business clarity through the Sacconaghi fog.

      Finger on the pulse. Always.

      1
      October 9, 2021
  11. In just the past 5 years Apple shares are up ~390% while the S&P rose 107%.
    Apple shares are one of if not the mostly widely held shares, anywhere. Many investors in other nations, including the largest sovereign wealth funds but also individual investors look at their portfolios (on their iPhone) and cannot help but see Apple’s consistent returns over the long haul. Others hardly realize how much Apple share price growth contributed to ETFs or mutual funds where they’ve invested their retirement funds. Then they glance at their Apple Watch, realizing they must get back to work…

    3
    October 8, 2021

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