Despite the recent minor downturns, the stock market has had a promising beginning to the year, with the S&P 500 showing a 7.5% increase thus far. However, one notable name has been absent from the rally. Apple (NASDAQ:AAPL) stock has been under pressure, and has been a major underperformer, retreating by 10% year-to-date.
Evercore’s Amit Daryanani, a 5-star analyst rated in the top 4% of the Street’s stock pros, puts the lackluster performance down to 3 main factors. One, investors have been keen to play the AI trend, leaning into other mega-caps such as Nvidia, making them “more comfortable taking dollars away from AAPL.” Secondly, the data points to Apple losing smartphone share in China, a key market, amidst soft demand. Lastly, there are regulatory concerns, particularly in light of the DoJ/Google case, in which the tech giant has been accused of monopolistic behavior.
However, Daryanani thinks the sell-off is “rather overdone,” and believes there are “three distinct drivers that could unlock upside on the stock from here.”
So, what are these catalysts? One revolves around capital allocation. AAPL has committed to giving back more than 100% of its FCF to shareholders, targeting a neutral net cash position. If AAPL aims to maintain a Net Debt/EBITDA ratio of around 2x, this could potentially enable additional buybacks totaling $250-275 billion over the coming years. “We anticipate further details on this during their upcoming April EPS call,” Daryanani noted.
The other catalyst revolves around what Daryanani considers the “next supercycle.” As AI-enabled tools become increasingly prevalent, Daryanani expects there will be a “strong value proposition to run AI on the edge (inferencing).” Performing inferencing directly on devices like the iPhone offers several advantages, including reduced latency, enhanced security, and improved accessibility at lower costs. “We think AAPL’s AI strategy will focus on incorporating on-device inference for LLMs that will substantially uplift the user experience for not only the iPhone but also Mac/iPad,” the analyst explained.
Finally, Daryanani makes the case that the acceleration seen at Apple’s Services business is being underappreciated. The December quarter showed ‘low teens’ year-over-year growth while AppStore data for February displayed a “remarkable acceleration” to 16% growth. “We think this strength should continue and keep Services growth in the low teens range for FY24,” Daryanani summed up.
Bottom-line, Daryanani rates Apple shares an Outperform (i.e., Buy), along with a $220 price target, which implies ~27% upside from current levels. (To watch Daryanani’s track record, click here)
Daryanani’s objective is a bit above the Street’s average, which stands at $204.86, making room for one-year returns of ~19%. Rating wise, based on a mix of 16 Buys, 9 Holds and 1 Sell, the Street’s view is that this stock is a Moderate Buy. (See Apple stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
