Despite optimistic expectations concerning the iPhone upgrade cycle, an analyst at BofA Securities prefers to stay on the sidelines of Apple Inc. (NASDAQ:AAPL) due to valuation that has become less attractive.
The Apple Analyst: Wamsi Mohan downgraded Apple from Buy to Neutral, but increased the price target from $420 to $470.
The Apple Thesis Since mid-June, when BofA argued for a valuation multiple rerating, Apple shares have seen a rapid multiple expansion.
Against a backdrop of shares trading at the highest premium to the S&P 500 Index in 10 years, the analyst outlined a few risks to calendar year 2021 estimates:
- Product gross margin pressure stemming from higher costs of 5G iPhones
- Unit volume risk if ASPs are set higher to offset gross margin pressure
- Tough compares in 2021 for the high-margin App store growth
- Lower impact from share buybacks
- Potentially higher tax rate if Democrats win in the U.S. elections in November
COVID-19 progression, anti-trust regulation on App Store, and China trade risks create additional risk to the $17 EPS buyside expectations for the calendar year 2021, Mohan said. Additionally, Services deceleration and lower GM create incremental risk to the multiple.
BofA's $470 price target is based on the premise the company achieves low-single digit year-over-year revenue growth and flat margins for the hardware segments, and high-teens revenue growth and 50 basis point margin expansion for the Services business.
BofA is of the view at current levels, Apple shares offer a balanced risk-reward.
AAPL Price Action: Apple shares were down 0.67% to $439.78.
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