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However, the latter cautioned that inflated iPhone 12 expectations “may make the music stop” and questioned market enthusiasm about a “5G supercycle.”
In analyst notes published early on Friday, Morgan Stanley increased its price target for Apple from $296 per share to $368 per share while Nomura lifted its projection from $225 per share to $280 per share.
Apple’s stock is up a staggering 103% over the past 12 months, and Morgan Stanley analysts projected that it will continue to outperform its hardware peers based on peaking smartphone replacement cycles combined with the upcoming 5G product cycle.
Morgan Stanley’s note highlighted that the iPhone replacement cycle has stretched to nearly four years since the market moved from subsidies to installment plans and the pace of technological change slowed.
“However, longer battery life and upcoming 5G technology which will enable new functionality like Augmented Reality combined with aggressive trade-in offers that subsidize upgrades for existing iPhone owners suggest replacement cycles can’t stretch much further and may in fact begin to shrink,” the note said.
At the same time, Apple’s dependency on the iPhone for earnings has declined, with services and wearables now constituting 27% and 37% of profits, Morgan Stanley pointed out.
The increased target is based on a higher full-year 2021 revenue base, increasing peer-driven price-to-earnings (P/E) multiples and the separation of Apple’s wearables, home and accessories products from the rest of its established hardware business, with a new and distinct multiple assigned to that business.
Morgan Stanley’s implied P/E target was upped on this basis from 19.1 times to 22.2 times. A P/E ratio is an important metric used by traders to gauge the value of a stock.
Nomura’s price target increase was based on strengthening iPhone demands and orders suggesting that the iPhone 11 cycle will carry through 2020, with wearables offering an extra boost.
However, Nomura analysts suggested that Apple’s current P/E ratio of 21 times earnings, up 4x since the iPhone 11 launched and 7x above its five-year average, was based primarily on market anticipation of a pending “5G supercycle,” which may be misguided.
“We expect the $40-80 incremental BoM (bill of materials) cost to a 5G phone to be a barrier to adoption,” the note said, adding that “no link in the value chain — consumers, suppliers, operators, or Apple itself — is likely to shoulder that cost burden.”
Nomura also pointed out that upgrade rates declined during the 3G to 4G cycle, and that Apple has ordered between 75 and 85 million iPhone 12 models for the second half of 2020.
This is up 10% from the 70 million to 75 million iPhone 11 models it ordered in the second half of 2019, but analysts argued that a $315 share price likely assumes full-year 2021 volumes of approximately 250 million, up 30% from full-year 2020 volumes.
As such, Nomura retained a “neutral” stance on Apple stock and applied an 18.5 times earnings multiple to reach its new target of $280 per share, but was “unwilling to go further.”