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Evercore analysts think Apple (APPL) stock is undervalued but believe the company can continue to drive strong momentum in services while increasing average selling prices to partially offset iPhone unit declines.
Is Apple stock outperforming? That’s what everyone from investors to analysts are trying to prove in the last few days. Evercore ISI analyst Amit Daryanani started coverage of the company with an Outperform rating and a $205 price target that is somewhat below FactSet’s average near $210.
“We believe the stock is undervalued at these levels. From a business-line perspective, we believe the company can continue drive strong momentum in services while increasing average selling prices to partially offset iPhone unit declines.”
But let’s look back to last year when Apple became America’s first trillion-dollar company. It then beat its Silicon Valley rivals such as Amazon and Microsoft but since everything that’s nice doesn’t last long, it was beaten this year by, again, Microsoft.
In just one year, Apple’s market capitalization fell to less than $850 billion. However, investors may still entertain hopes of seeing Apple hit 13 figures again.
Evercore analysts think that both revenue and sold units of Apple’s main product, the iPhone, will remain “muted.” Daryanani explained that we could see several catalysts that should enable AAPL stock to grind higher from current levels. He is looking for a rise to $205 per share within a year, which would add 12% to Apple’s market cap, putting it at about $950 billion.
Daryanani believes that Apple will launch a 5G-capable iPhone toward the end of its fiscal 2020, and that should lift both unit sales and revenue. He also advises that Apple could do more of a job by just positioning its iCloud offering as appealing to the enterprise market, making “a more unique and comprehensive solution for office productivity.”
Keeping an Eye on the U.S.-China Talks
However, the company is advising investors to be careful and to keep an eye on the U.S.-China trade talks:
“Thus far, Apple has managed to avoid tariffs on finished products, but it’s possible they will be impacted by future trade actions as Sino-American trade talks have broken down in recent weeks. The impact of tariffs will depend on both the applied tariff rate and Apple’s ability to pass costs onto customers. In our worst case scenario (25% tariffs, no cost passed on), we estimate Apple’s 2019 [earnings per share] could fall by ~21%.”
At the moment Apple seems to be safe from President Trump’s decision but he has been threatening to impose a 25% tariff on an additional $325 billion worth of Chinese exports to the U.S. The Chinese government has countered the Trump administration with their own tariffs.
It is not hard to imagine that, if the trade war escalates further, especially since the Chinese market is full of less expensive, Chinese-made smartphone options from the likes of Xiaomi and Huawei, this situation could make great damage to Apple.
We also shouldn’t forget that Apple recently announced news about investing $500M in video game and streaming video offerings that are more likely to grow the multiples investors are willing to pay for its business. In Apple’s 2018 financial report, for example, the company let on that it generated $37 billion from services, and earned 60% gross margin on those sales, and that’s very close to flagship-phone levels of profit.
Be it as it may, 87% of all profits earned by all smartphone makers around the world went to Apple, which is why the iPhone is a key to the business.
At the time of writing, Apple (AAPL) stock closed at $185.22 in the latest trading session, marking a +1.47% move from the prior day. The stock outpaced the S&P 500’s daily gain of 0.82%. At the same time, the Dow added 0.82%, and the tech-heavy Nasdaq gained 0.64%.