Is Apple overvalued? Not by a long shot

Apple's next generation

It's almost unfathomable why some investors are turned off by Apple's (AAPL) stock. One reason may be that its price has been ramping up for at least the past five years. It shot to an all-time high of $164 a share on Sept. 11, 2017, the day before Apple launched its new iPhone lineup, spearheaded by the iPhone X.

The stock has since slipped, closing at $159.88 on Sept. 15, but some Apple bulls see it soaring to $200 a share.

With the share price having risen some 39 percent year-to-date, outscoring the S&P 500's 11 percent gain, bears are raising their warning signals that the stock has become overvalued.

"Many investors now feel they should 'sell the news,' but we disagree and rather raise our price target to $200 from $190 as rising iPhone ASPs [average selling prices] further accelerate revenue growth," argued Robert Chira, equity analyst at Guggenheim Securities, who rates Apple shares a "buy."

iPhone X: Do Apple's innovations go far enough?

"We continue to see Apple now set up for its longest iPhone cycle in three years, providing more runway for appreciation driven by our expectation for 1) pent-up demand, 2) a multi-year OLED display rollout and 3) double-digit increases in iPhone's blended ASP," said Chira.

Apple unveiled its new iPhones "almost exactly as anticipated," he noted, with "evolutionary refreshes of the iPhone 8/plus and its new higher-end $999 IPhone X, with edge-to-edge OLED display and 3D sensing facial recognition."

Also of great interest was Apple's launch of the new Apple TV 4K that's capable of live-streaming 4K content. And a new Apple Watch 3 was also introduced, which will support cellular connectivity and use the same phone number as the iPhone it's paired with.

Chira pointed out that raising his price target for Apple's stock to $200 from $190 is just a 5 percent increase, but that comes, he added, with the "extra sentiment baggage of implying that Apple would become the market's first $1 trillion market-cap company." Yet that new price target would just require "pushing Apple's current price-earnings ratio of 17 times and enterprise value/free cash flow of 12-13 times out from 2017 to our 2018 estimates, which we consider appropriate," said Chira. 

But not everybody was thrilled with Apple's latest product reveal. "We viewed the iPhone X launch event as neutral," said Andy Hargreaves, analyst at KeyBanc Capital Markets, who rates Apple shares a "sector weighting," which is equivalent to a neutral rating.

He was "disappointed by the lack of incremental functionality in the iPhone X to justify the $999 price point." He believes it raises "the risk that future cycles will see trade-down behavior and correlated pricing pressures."

Apple's stock soars on earnings beat

Added Hargreaves: "We view Apple as fairly valued and remain Sector Weight," noting that iPhone X provides little to drive an upgrade beyond the look. He warned that the disappointment raises the risk that Apple "will struggle to drive incremental upgrade activity in future cycles." 

But he expressed positive surprise over the Apple Watch's functionality and the price increases for the iPhone 8 and 8 Plus.

JPMorgan analyst Rod Hall, however, pointed out that "we continue to believe that Apple is likely to see better replacement demand into 2018 than Street consensus implies, and reiterate our 'Overweight' recommendation for that reason." 

And Angelo Zino, equity analyst at CFRA Research, is maintaining his "buy" recommendation on Apple, with a price target of $175. "We like the features in the iPhone X (the OLED screen, Face ID, and animoji) and think the $999 price for iPhone X is fair," although he sees the phone's Nov. 13 availability putting the December quarter estimates "at risk."

Stephen Turner, analyst at investment firm Hilliard Lyons, has increased his share price target to $182 from $180 and continues to rate Apple a "long-term buy." He raised his earnings estimates for fiscal year 2018 to $10.48 a share from $10.45 and increased his 2019 earnings forecast to $11.39 a share from $11.25.

"Our updated outlook assumes higher average selling prices for iPhones and the Apple Watch through our investment time frame, which we offset to a certain degree with some gross margin conservatism due to new product launch constraints," said Turner. 

Analyst Amit Daryanani of RBC Capital Market, who rates Apple as "outperform" with a price target of $180 a share, believes the new form factors and features of Apple's new devices, including wireless charging, augmented reality enablement and 3D sensing added to the flagship device "will drive accelerated device upgrades within Apple's installed base, combined with increased switching activity." 

Daryanani said Apple's current stock priced creates an attractive entry point for investors to benefit from the company's ability to return to revenue and earnings per share growth in fiscal 2017. Multiple catalysts, he pointed out, remain as the company benefits from the iPhone upgrades, Mac/iPad refresh cycle, potential TV launch and improvements in capital allocation. 

The analyst believes the "fundamental reality remains that Apple's valuation is materially subpar to what we anticipate is its long-term revenue and [earnings per share] potential."

Apple has "raised the bar on pricing with it new products," argued Brian Colello, analyst at Morningstar, who said he doesn't think any Android competitor could sell phones at these prices "because they don't have the customer loyalty, the customer stickiness that Apple has." 

With the impressive history of Apple's stock performance over the years and the company's persistently impressive creativity,  its share price's demonstrated growth momentum deserves attention from investors who are always seeking new heights.