After being neutral on Apple's stock since 2018, here's why one analyst changed his tune

By Emily Bary

Apple's stock nabs a Bernstein upgrade: 'Buy the fear'

An analyst who had spent more than six years on the sidelines on Apple Inc.'s stock just changed his tune, joining the bull camp in a note titled "Buy the fear."

Bernstein's Toni Sacconaghi upgraded Apple shares (AAPL) to outperform from market perform on Monday, writing that they look cheap on a historical basis. He had been at a market-perform stance since February 2018.

The stock had underperformed the broad market by 19% as of the writing of his note, and Sacconaghi noted that it was trading below its three-year and five-year average relative multiples of price to forward earnings. Apple's stock "is less expensive that it appears," he added, given its "very high" realization of free cash flow, at 115% of net income.

"Our belief is that - like Buffett - investors should look to add to positions at the bottom of the stock's valuation range, and trim at the top," Sacconaghi wrote.

Apple shares rose 2.5% on Monday.

Read: Amazon's biggest earnings question mark has nothing to do with its results

The company stands to benefit from a strong replacement cycle for iPhones, according to Sacconaghi. He also thinks concerns about Apple's China business may be overblown.

"While China risk could be existential for Apple, we don't believe anything has structurally changed," he wrote. His checks with contacts in the country found that the picture there is similar to what it was like when he last conducted checks in December. That means that while some informal bans on iPhone purchasing do exist at certain state-owned enterprises in China, "many of these restrictions have been in place for years ... and they do not appear to be becoming incrementally more widespread."

Apple's China business has always been more subject to cyclical swings than business in other markets "to both the upside and the downside," he said.

In general, he's encouraged by "the possibility of a strong iPhone 16 cycle, fueled by [artificial-intelligence] functionality, as well as elongated replacement cycles." And he sees a low bar heading into the company's earnings report on Thursday.

See also: What Apple investors should make of stock's 'tricky setup' ahead of earnings

While consensus expectations are for $83.2 billion in revenue, he thinks investors might be fearing something more in the $80 billion realm. That means investors could be relieved to glean that management's view is for anything above $80 billion. (Apple has declined to give specific formal guidance in recent years.)

Apple's forward commentary could prove to be a clearing event for the stock, he continued. "Apple's stock also has a striking and persistent pattern in which it outperforms leading into iPhone announcements," according to Sacconaghi, who said that in the past 15 out of 17 years, shares have outperformed during the three months prior to a launch.

-Emily Bary

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04-29-24 1930ET

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