Why a Bernstein Analyst Says Apple Shares Will Struggle To Rally From Here

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Trigger warning for Apple bulls: I’m about to address the case for caution on the stock.

Bernstein analyst Toni Sacconaghi lays out the case in a research note on Thursday. He focus on the most basic question for

Apple

(ticker:AAPL) shares: What can drive the stock higher from here?

Sacconaghi points out that Apple has re-rated over the last two years from a below-market multiple to one trading at a 24% premium to the market. Apple traded at a discount to the market from 2013 to 2019, he notes. Apple now trades at a forward P/E of 26 times, he writes, “elevated” relative to historic norms.

The analyst starts by reviewing the bull case for the stock. He notes that Apple fans say the company has a leverageable consumer brand that will allow Apple to both increase prices and enter new categories, like cars and artificial reality headsets.

Apple bulls see the installed base of 1.65 billion devices offering ample room to deliver new services, including advertising, and possibly even social media. Not least, Sacconaghi writes, bulls see potential for higher gross margins as services become a higher percentage of the company’s revenue mix, creating the potential for consistent double-digit per-share earnings growth.

But Sacconaghi counters that he sees limited room for earnings growth in the September 2022 fiscal year given a likely pullback in growth across the product line. His current model projects revenue for FY 2022 declining slightly from the current year.

In his view, the most likely source of further gains in Apple shares in the near term would have to come from further multiple expansion. He thinks that’s possible if the iPhone 13 cycle is stronger than expected, Apple sets an aggressive new goal on services revenue growth or begins offering its products as a service. (But he’s not betting on it.)

Sacconaghi also asserts that Apple’s current valuation is “relatively full,” trading inline to higher than other tech megacaps, in particular

Facebook

(FB) and

Alphabet

(GOOGL), which as he notes have both better expected growth rates and higher margins.

“Looked at another way, close to 100% of revenue from Alphabet and

Facebook

have financial characteristics of Apple’s attractive services business,” which is about 20% of the company’s overall revenue, but Apple trades at a similar multiple to Alphabet and a premium to Facebook.

Sacconaghi thinks long-term Apple is likely to be a low-to-mid single digit grower. His view is that 70% of the revenue base – iPhone, Mac and iPad – are unlikely to show any long-term growth. He sees new products growth in the 15% range, and projects 15% growth for the services business, generating a blended long-term growth rate in the 4% to 5% range. (Note that as recently as FY 2019, Apple reported a slight revenue decline.)

Concludes Sacconaghi: Given Apple’s relatively high valuation and the probability that tha the company will struggle to grow in fiscal 2022, the current risk-reward on the stock is “neutral to slightly negative.”

Amid a broad market rally, Apple shares are up 1.5%, to $144.07.

Write to Eric J. Savitz at eric.savitz@barrons.com