Despite Apple surpassing a valuation of $2 trillion last week—becoming the first U.S. company to do so, Morgan Stanley analysts argue that the tech giant remains undervalued, raising their price target for the stock to the highest among major Wall Street firms.
Apple’s stock skyrocketed to new all-time highs last week, gaining over 8% and now trading at just over $500 per share.
Despite its high valuation, Morgan Stanley analysts are still bullish on Apple, raising its price target for the stock to $520 per share from $431—now the highest of any major Wall Street firm, according to FactSet.
At 25x free cash flow, “Apple trades at a discount to both tech platforms and strong consumer brands,” Morgan Stanley’s note said.
The analysts point out that Apple’s free cash flow has grown more than 20% annually over the last four years, despite a slowdown in iPhone sales: “These results underscore the strength of Apple’s broad ecosystem of products and services, a change from past years where Apple was more reliant on the success of the iPhone to drive growth.”
Morgan Stanley said that those results also demonstrate the “increasing engagement and stickiness of Apple’s customer base.”
The firm believes that Apple can “continue to outperform peers and the S&P 500 in the near term,” thanks to two upcoming catalysts: A 4-for-1 stock split at the end of this month and the launch of the first 5G iPhone in October.
“We increasingly believe that Apple should be valued like a technology or consumer platform, rather than a more cyclical hardware company,” Morgan Stanley’s note said. “Apple proves that a more diverse portfolio combined with loyal customers and increasing engagement translates to more secular, not cyclical growth.” The analysts estimate that in a base case, between 2021 and 2026, the company will grow its revenue 8% annually and earnings per share by 11% annually.
What to watch for
Morgan Stanley analysts also shrugged off the company’s ongoing legal battle with Epic Games, the developer of Fortnite, calling the loss “immaterial” to Apple’s revenue base. The Fortnite app generated an estimated $130 million of revenue for Apple in the last twelve months, which equates to roughly 0.04% of Apple’s total revenue base, the analysts note. “Entire industries have been created because of the App Store,” they said, pointing to high-profile examples such as Facebook, Uber, Instagram and Grubhub. What’s more, based on data from Sensor Tower, customers are spending more than ever in the App Store: Total spending was up 25% year-over-year in the twelve months ending July 2020.
The tech giant became the first publicly traded U.S. company to reach a market capitalization of over $2 trillion last week. Apple is also planning a 4-for-1 stock split on August 31, which has been cheered by investors. Morgan Stanley’s price target would equate to $130 per share after the stock split.
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