Apple Analyst Goes Neutral, Cites Impending Risks And Valuation Concerns

Despite optimistic expectations concerning the iPhone upgrade cycle, an analyst at BofA Securities prefers to stay on the sidelines of Apple Inc. 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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