Bear Attack: Could Apple Stock Really Drop 40%?

One of two Wall Street analysts that had a sell rating on Apple stock threw in the towel. The other still thinks that AAPL shares could drop 40%. Is the sizable downside risk realistic?

On the first day of September, one of the rare Wall Street bears on Apple stock (AAPL) finally gave in and dropped his sell rating. The last remaining one still sees shares dropping to a price target of $90, representing risk of loss of around 40%.

Could New Street’s Pierre Ferragu, the last remaining Apple bear on Wall Street, be right about his downside call? The Apple Maven looks a bit closer at the argument.

Why bearish on Apple?

The core of Pierre’s bearish argument seems to be the iPhone. The analyst has called the upcoming device launch a “12S cycle”, arguing that the best of Apple’s iPhone upgrade wave,the so-called 5G super cycle, has been left in the rearview mirror.

New Street subscribes to the view that the strong iPhone 12 cycle has pulled forward smartphone sales, leaving a gap in demand going forward. Interestingly, this is exactly the opposite opinion of bullish Wedbush analyst Dan Ives, who said the following during an interview with the Apple Maven:

“What the Street underestimates is how massive and elongated this super cycle is. […] 5G does not get fully embraced for the next two or three years, until the networks are built out. In China [where the 5G infrastructure is further ahead], the iPhone 12, especially the larger Pro versions, really sold extremely well.”

Still on the iPhone, Mr. Ferragu laid out his expectations for 2022 back in April (I am unaware of revisions since then). He believes that iPhone shipments will reach 190 million units, suggesting segment revenues of around $150 billion – a modest annual increase of 5% from COVID-19 levels.

Could AAPL sink 40%?

Now, let’s put pen to paper. For Apple stock to be valued at $90 apiece, one of two things would need to happen: either financial performance would need to lag consensus expectations, or valuations would need to contract (or a combination of both).

On results,Wall Street currently sees fiscal 2022 EPS landing at $5.63, roughly flat against a 2021 that has been impressive so far. For AAPL to drop 40% in price, therefore, next-year earnings would need to miss consensus substantially, by at least a couple of dollars. I find this highly unlikely.

On valuations, AAPL currently trades at a fiscal 2021 earnings multiple of 27 times. Assuming consensus-matching results in the future, this multiple would need to drop to about 16 times for AAPL shares to sink to $90. The stock’s forward P/E has not been this low in years.

The Apple Maven’s take

I find it very improbable, if not virtually impossible, for Apple to ever be valued at $90 per share again. It is much more reasonable, in my opinion, that New Street’s current price target on the stock is simply stale, following AAPL’s 25% rally in the past six months.

Therefore, I would not be surprised to see Wall Street’s last AAPL bear eventually (soon?) give in on his downside convictions, at least in what pertains to his current price target.