Why Apple's Stock Valuation Could Present Long-Term Buying Opportunity

Apple Inc. AAPL shares have shown muted performance year-to-date, and an analyst at Morgan Stanley sees long-term buying opportunity in the shares of the tech giant.

The Apple Analyst: Katy Huberty reiterated an Overweight rating on Apple with a $162 price target.

The Apple Takeaways: The incoming call volume on Apple shares is at a low amid investor concerns over a seasonally low period in the iPhone cycle, regulatory risk and difficult comps relative to the COVID-19-driven work-from-home and study-from-home demand, Huberty said in a note.

Additionally, investors fear a more evolutionary iPhone s-cycle will lead to extended iPhone replacement cycles, the analyst said.
Revenues will likely decline in 2022, increasing the likelihood of negative estimate revisions, she said.

"We recognize these risks but have a more positive outlook," Huberty said.

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The dominant bear case narrative now is the iPhone entering a more modest upgrade or "s" cycle — a period when iPhone revenue historically declined at a double-digit rate, the analyst said. She forecast a low risk of similar iPhone revenue decline next year.

This is due to the longer period of iPhone replacement cycle relative to the past, an expansion to Apple's trade-in, financing and installment offers and 5G adoption, which is still in its nascent stage, Huberty said. 

"Taken together, these factors build confidence that the iPhone 13 cycle will not look like past s-cycles, which is reflected in our updated FY22 iPhone forecast of 231M units," the analyst said.

The June quarter will be stronger than originally expected, as iPhone and iPad builds are tracking ahead of Morgan Stanley's estimate, she said.

Huberty raised her June quarter revenue and EPS estimates by 3%-5%.

Apple's catalyst path is more back-end loaded this year, the analyst said. 

The company can drive low-teens annual revenue growth and high-teens annual EPS growth between fiscal years 2020 and 2023, she said. 

"At24xFV/FCF, we believe the current valuation presents a good long-term buying opportunity."

AAPL Price Action: Apple shares lost 0.22% in Thursday's session, closing at $133.41. 

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Photo: Apple CEO Tim Cook. Courtesy of Apple.