New Street Research’s analyst Pierre Ferragu had been the lone wolf (or lone bear) on Wall Street. With a sell rating on Apple stock (AAPL) – Get Apple Inc. Report until the company’s most recent earnings report, he believed that AAPL could drop to as low as $90 per share.
But Mr. Ferragu has thrown in the towel and upgraded his views on Apple shares to neutral. Today, the Apple Maven looks at what caused the analyst to change his mind.
Figure 1: Apple Stock: Why The Last Bear Has Finally Given Up
Unsplash
(Read more from the Apple Maven: Why Apple Stock Shot Higher On Tuesday)
AAPL: from bear to neutral
New Street used to have a bearish rating on Apple, first and foremost, because of the iPhone. To be fair, the downbeat thesis did not seem outrageous.
First, the pandemic days drove demand for tech gadgets that resulted in Apple shipping a record number of 5G-capable smartphones in 2020 and early 2021. Pierre then compared the iPhone 13 to an “iPhone 12S cycle” that lacked the innovation needed to encourage consumers to buy the new model, following what could have been pulled-forward demand.
But the analyst’s convictions proved flawed on the back of another round of impressive iPhone sales in the 2021 holiday quarter. In fiscal Q1, iPhone revenues grew nearly 10% on top of already tough comps of 17%. As the graph below depicts, the segment has posted the best growth rates on a TTM (trailing twelve-month) basis.
Figure 2: Apple’s TTM revenue growth by major product segment.
DM Martins Research, data from company reports
Faced with the hard facts, Pierre was reasonable to admit that he had been wrong about his bearish thesis. In his own words, during his late January interview with CNBC:
“What we saw in the last print was a very, very strong quarter and a very, very confident guide that goes head first against our thesis. The quality of demand for the iPhone today is something that is breaking our framework. There is something we are missing.”
But why not bullish?
Giving up a bearish thesis does not mean that an analyst needs to be an Apple bull, necessarily. In fact, Pierre Ferragu explained that he does not have “any view that is in opposition to what you would find in consensus today. [So he feels] that the stock is reasonably valued”.
The CNBC host pressed the analyst further, asking about what could make the analyst turn bullish on Apple stock. He elaborated as follows:
“We don’t think there is anything mispriced, […] this is not an investment for which we would pound the table. What would make us change our minds […] are the next steps for Apple, which are the AR/VR headset and the car.”
But don’t hold your breath. Pierre thinks that “the next big thing” opportunities are still very open-ended in regards to breath and depth. Also, he thinks that the growth ramp up should not be very steep, therefore investors need not rush into the stock ahead of it.
The Apple Maven’s take
Despite being a cautious bull myself, I always appreciate the bearish perspective. By losing the last analyst with a sell rating on Apple, Wall Street becomes overwhelmingly optimistic about an investment in the stock, which can be a bit dangerous if it creates overconfidence.
That said, Pierre Ferragu has clearly been on the wrong side of the trade for too long. His old $90 price target suggested that Apple stock could have dropped by more than 40% from the pre-earnings price of $160. Clearly to me, this was all but impossible to happen with a high-quality company executing as well as Apple has been lately.
New Street Research’s current price target of $165, still suggesting 6% downside risk, is much more reasonable and consistent with valuations that currently hover near an all-time high. That said, I still find the price projection a bit conservative, as I think Apple stock should rise — even if not viciously — from its current $175 levels over the next 12 months.
Twitter speaks
The last Apple bear on Wall Street has thrown in the towel. Now, the most pessimistic analyst has a neutral rating on the stock and share price target of $161. What is the worst-case scenario for AAPL in the next 12 months, in your opinion?
(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting the Apple Maven)
