Bernstein's Toni Sacconaghi Steps To The Sidelines On Apple, Sees Minimal Upside Ahead

Apple Inc. AAPL's fiscal first quarter earnings report prompted one of the Street's most notable Apple analysts to part ways with his bullish stance.

The Analyst

Bernstein's Toni Sacconaghi downgraded Apple's stock from Outperform to Market Perform with a price target slashed from $195 to $170.

The Thesis

Despite a downgrade, Apple remains a "formidable" company backed by a "war chest" of cash and a "burgeoning" services business, Sacconaghi said in a note.

Here are four reasons he no longer holds a bullish stance.

• Apple's stock has gained 45 percent in 2017 on expectations of a strong iPhone X and iPhone 8 cycle, the analyst said. But the "verdict is in" and the current cycle, at least so far, is weak with expectations for flat growth in iPhone sales in 2018.
• Several read-through of Apple's earnings report is worse than it appears. For instance, the iPhone channel inventory rose 4.2 million units sequentially which marks the highest in history.
• Apple's operating expense have grown faster than revenue in nine out of the past 10 quarters which resulted in compressed operating margins. There are no signs this trend will reverse in 2018 as the company already committed to raising its R&D spend.
• Apple could oversee a "huge" share buyback plan which would support earnings over the coming years. It's unclear, however, how much of this benefit is priced into the stock at current levels.

"We believe risk reward is coming more into balance, particularly since it is unclear what catalysts might exist for the shares in the near-to-medium term," Sacconaghi concluded.

Price Action

Shares of Apple were trading lower by 2.5 percent at $163.63 Friday morning.

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