One Big Reason Not to Be Short on Apple (AAPL) Stock

Apple stock

Shares of Apple Inc (AAPL) are up slightly this morning despite getting a thumbs-up by Needham’s analysts, who in a research note to investors rated the stock a ‘Strong Buy’ with $150 price target. The firm notes that since July 6 when location-based augmented reality mobile game Pokémon Go was introduced in the U.S., Apple’s market cap rose by $2 billion between July 6-18. Needham estimates that Apple could generate $3 billion of incremental high-margin revenue from Pokémon Go over the next 12-24 months.

With less than a week to go until its earnings report, there’s no shortage of opinions on Apple. UBS’s Steven Milunovich yesterday reiterated a ‘Buy’ rating and $115 12-month base case estimate on the stock, saying that despite what he expects to be a lackluster third-quarter, Cupertino’s long-term outlook looks better than the near term.

Speaking of earnings – Apple is slated to step into the earnings limelight this coming Tuesday, and Wall Street isn’t expecting much from the technology giant. Checking in on the numbers, the consensus is for Apple to post $42.35 billion in sales during the quarter. This would show a 16.30% decrease from the 2Q16 revenue of $50.6 billion as well as a decrease of 14.62% from the same period in the third-quarter of 2015. EPS in 3Q16 are expected to come in at $1.39, a decline rate of 33% from $1.85 per share a year earlier. Meanwhile, reports a whisper number of $1.43 per share.

As a quick reminder, Apple reported second-quarter 2016 EPS of $1.90, $0.10 lower than the Street’s consensus estimate. Revenue plunged 12.76% year-over-year, bringing the company’s 13-year growth streak to an end. The decline prompted many in Wall Street to question whether the iPhone, Apple’s bread and butter gadget, had peaked.

While sales of the iPhone are expected to remain comparatively slow in fiscal 2016, UBS’s Steven Milunovich says he believes the iPhone business will recover. In fact, he sees iPhone sales stabilizing in fiscal-year 2017 and growing 15% in FY2018 on a strong upgrade cycle. Milunovich thinks this should infuse some optimism in Apple’s stock and help its multiple expand, even though he sees the stock remaining somewhat range-bound for now.

There is no question, and this based on some objectively valid reasons such as iPhone sales drop, that Apple’s stock has taken a beating this year. Cupertino’s shares have declined 6.02% in the past three months, 4.95% year-to-date, and have plunged more than 22% year-over-year. However, let’s not forget that despite its price depreciation, the stock still trades only at 11x its trailing-12 and forward earnings. Additionally, the company’s massive $230 billion cash position gives it a fair valuation. More importantly, the name’s price-per-share currently reflects mostly investor sentiment, as opposed to company’s fundamentals. This major catalyst, we believe, should continue to provide a base for the stock going forward.

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