| | | Apple (AAPL) PT Lifted to $700 at Bernstein; 5 Reasons to Support the Higher Target
May 28, 2014 8:39 AM EDT
Bernstein analyst Toni Sacconaghi lifted his price target on Apple (NASDAQ: AAPL) to $700
(from $615.00) Wednesday, while reiterating his Outperform rating. The analyst sees several
reasons to continue to be bullish on Apple stock in the near-term.
In his report, Sacconaghi listed five reasons for the price target hike:
First, the analyst noted that Apple's stock is highly anticipatory around new product cycles, historically
outperforming meaningfully (1100 bps) in the two months prior to new iPhone introduction. He also
expects Apple will introduce a new product category before year end, which the believe will be an iWatch.
Second, he said growth investors are collectively, significantly underweight Apple. "Given Apple's large
benchmark weight, we believe that growth investors are likely to close/minimize underweight positions
heading into a major product cycle that could trigger upward revisions and investor enthusiasm," he said.
Third, he sees Apple's forthcoming stock split as an event that could broaden retail interest and
psychologically make it easier for stock price to climb (e.g., $90 to $100, vs. $625 to $700). "Historically,
our analysis points to evidence that companies that split their shares outperform in the near-term," he said.
Fourth, Sacconaghi sees little risk of Apple missing estimates for the June quarter as not only is it new
CFO Luca Maestri's first quarter, but Apple can use price elasticity to boost iPhone sales, as it did last
year during the June quarter. Also, has considerable discretionary buyback power that it could use to
support the stock following any near-term pullbacks.
And finally, the analyst said Apple's valuation at $625 is still very low compared with the market overall
and even the broader technology sector, pointing to no near-term "ceiling" on valuation. "Even at a price
of $700/share, Apple would trade at ~10x EV/FCF, a valuation that would still imply a modest free cash
flow decline in perpetuity," he said. "In essence, we do not believe investors are likely to worry about
Apple's valuation level as long as estimates appear likely to increase in the face of positive news flow."
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