At This Price, Is It Too Late To Buy Apple Stock?

Apple Inc. AAPL's stock continues to trade near its all-time high of $142.80 and has already gained 22 percent since the start of 2017 and nearly 35 percent over the past year. With that said, Steven Milunovich of UBS took a deep dive into the hotly debated question: is it too late to buy Apple's stock.

Apple's 3 Phases

Milunovich noted that Apple will undergo three phases that will drive shares:

1. The current "Supercycle" phase.
2. The upcoming "Sustainable Growth" phase.
3. The "Innovation phase."

First, the current "Supercycle" phase consists of debating the iPhone growth through the fiscal 2018 and 2019 period. Over the next nine months, the shift toward the "Sustainable Growth" occurs where investors will explore if the company can maintain and monetize its installed base and generate annuity-like growth. The "Innovation Phase" will start in fiscal 2019 whereby investors will examine Apple's positioning for the next wave of technology.

Supercycle Phase

According to Milunovich, the "Supercycle" phase started in 2016 but the key debate will surround the iPhone 8's performance in fiscal 2018.

Meanwhile, Apple's valuation improved during the cycle from a low of 10x forward P/E in early 2016 to today's 15x multiple. Since Apple's stock typically prices in earnings revisions 12 months ahead, it is possible that a strong fiscal 2018 performance is priced into the stock today.

Sustainable Growth

Moving on to the "Sustainable Growth" phase, Apple's stock could be valued as low as 13x (amid concerns over the hardware business, no signs of innovation, slowdown of other products) and as high as 16x (sustainable growth in hardware, installed base-centric view of Apple, other products gaining traction).

Innovation Phase

If Apple remains quiet on new product lines, then investors would rightfully "fret about the sustainability" of the hardware business. This could drive Apple's stock multiple to 11–13x. On the other hand, if investors see a "large new wave to ride" then Apple's multiple could move as high as 17x.

Path To $200 Per Share

The analyst's most likely outcome assumes Apple's stock will trade at around $175 per share within two to three years. This is based on a 12 percent iPhone unit growth in fiscal 2018 and 7 percent in fiscal 2019.

Apple's stock multiple will move slightly lower to 14x, which is still a premium to historic levels but below today's level.

A more optimistic model derives a $200 valuation by fiscal 2019. The analyst is assuming Apple will show strong growth in its "other hardware" category and the stock trading at a 16x multiple. However, the stock's valuation can rise as high as even 18x, if Apple enters new large markets such as transportation and management becomes even more aggressive in share buybacks than they have in the past few years.

Related Links:

Why Apple Needs China Growth To Strengthen This Year

Competition Only Helps Apple Ripen, An Advantage Over The FANG Stocks