Institutions still underweight on AAPL despite strong 2020 growth, analyst says

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Institutional ownership of Apple stock remained close to an all-time high of 5.5% as 2020 came to an end, though large organizations still underweigh the stock, investment bank Morgan Stanley says.

Credit: WikiMedia Commons
Credit: WikiMedia Commons


In a note to investors seen by AppleInsider, analyst Katy Huberty writes that institutional ownership of Apple stock was largely flat quarter-over-quarter exiting Q1 2021. Institutional ownership refers to large-scale organizations buying and holding shares of a company.

Huberty adds that Apple's weighting in the S&P 500 index remained "relatively stable" compared to the previous quarter at 6.7%. Because of that, the spread between Apple's S&P 500 weighting and its institutional ownership level was flat at 125 basis points. That's the widest margin since the third quarter of 2018.

The analyst believes that implies institutions are still underweight on AAPL shares, despite an 81% stock appreciation throughout 2020.

Huberty still believes that Apple is well-positioned to benefit from four different market trends. That includes the growth of 5G adoption for the iPhone; continued demand from remote education and work trends; the proliferation of wearable devices like the Apple Watch; and the increasing market share and monetization of services.

"In our view, these factors, combined with 140bps of gross margin tailwinds, 260bps of operating leverage, and over $80B of stock buybacks, will drive 22% revenue growth and 36% [earnings-per-share] growth in FY21," Huberty writes.

Over the longer-term, Huberty forecasts that Apple's ecosystem and services will sustain 10% annual revenue growth over the next five years -- 200bps above Wall Street's prediction of 8% growth in three years.

Huberty attributes that to accelerating device device installed base growth, faster Services monetization, and Apple's expansion into new and adjacent markets.

The analyst maintains her 12-month AAPL price target of $164. It's based on a sum-of-the-parts model with a 6x enterprise value-to-sales (EV/Sales) multiple on Apple's product business and a 13.1x EV/Sales multiple on Services. That results in an implied 7.5x target 2022 EV/Sales multiple and a 34x target enterprise-value to free-cash-flow multiple.

Shares of AAPL are priced at $125.02 in intraday trading on Wednesday, down 0.67%.

Comments

  • Reply 1 of 7
    Apple is still mainly known for selling iPhones, so I think big investors believe the smartphone market has little to no growth left.  Apple continues to burn money on buybacks and doing that doesn't help revenue or profits.  Imagine if Apple put $80B into purchasing streaming video content for Apple+.  Apple would easily be a bigger streaming powerhouse than Netflix.  Someone at Apple has decided that share buybacks are what investors want.  I wonder if that's really the case.
    elijahg
  • Reply 2 of 7
    I think the introduction of the M1 (and the series) is under-appreciated by analysts. These new in-house chips performance and mobility is attractive to business, and Apple will grow in that space, with a head-start on competitors. 
  • Reply 3 of 7
    mpantonempantone Posts: 1,528member
    Apple is still mainly known for selling iPhones, so I think big investors believe the smartphone market has little to no growth left.
    I'm pretty sure all of the big investors remember when Apple was still mainly known for selling Macs, not iPhones (debuted in 2007). I'm also convinced that big investors believe that smartphone growth opportunities still lie in emerging markets. For sure, the G-7 countries' smartphone markets are largely saturated. Apple would need to poach customers from other vendors in places like the USA, UK, France, Germany, Japan, etc.

    That's also why Apple continues to explore new markets. Heck, the iPhone itself evolved from the iPod and begat the iPad. More recently we have seen Apple explore wearables: AirPods, Apple Watch, and now AirPods Max. There is plenty of growth opportunity in the wearables segment.
    Apple continues to burn money on buybacks and doing that doesn't help revenue or profits.
    That's not the intent of a stock buyback. The primary goal of the stock buyback is to reduce the number of existing shares on the market (the "float"). The remaining shares on the market represent the company so each remaining share represents a slightly large percentage of the company. This is not specific to Apple Inc. Note that Apple regularly issues stock grants, RSUs, etc. so the number of outstanding shares steadily increases. In a very basic sense, this is the same with governments printing currency.
    Imagine if Apple put $80B into purchasing streaming video content for Apple+.  Apple would easily be a bigger streaming powerhouse than Netflix.
    Apple is increasing the amount of exclusive content but they aren't the type to spend their entire cash hoard all at once. They will strategically buy/invest/develop new original exclusive content in a sensible manner. They aren't betting it all on one dark horse longshot to win.
    Someone at Apple has decided that share buybacks are what investors want.  I wonder if that's really the case.
    My guess is that the investment community had some say about what Apple should do with their cash hoard. Not retail investors like your auntie or your older brother's girlfriend's uncle. I'm talking about the big institutional investors: FMR, BlackRock, State Street, Legg Mason, Vanguard, as well as the big pension funds (like CalPERS).
    edited February 24
  • Reply 4 of 7
    The stock is very overvalued by all historic metrics. At their scale, you cannot simply pull off enough miracles to justify a price that assumes absolute perfection going forward and the types of earnings increases needed to support that price. However, on the next pullback, buyers will snap up shares, both institutional investors and retail investors. It is great for long haul, but its growth runway for the stock is spent for now. 
  • Reply 5 of 7
    Apple is still mainly known for selling iPhones, so I think big investors believe the smartphone market has little to no growth left.  Apple continues to burn money on buybacks and doing that doesn't help revenue or profits.  Imagine if Apple put $80B into purchasing streaming video content for Apple+.  Apple would easily be a bigger streaming powerhouse than Netflix.  Someone at Apple has decided that share buybacks are what investors want.  I wonder if that's really the case.

    Imagine the Anti-trust fest that Netflix etc would engage in if Apple did just that?
    Growing organically is the only way to avoid that (for the time being)
  • Reply 6 of 7
    ike17055 said:
    The stock is very overvalued by all historic metrics. At their scale, you cannot simply pull off enough miracles to justify a price that assumes absolute perfection going forward and the types of earnings increases needed to support that price. However, on the next pullback, buyers will snap up shares, both institutional investors and retail investors. It is great for long haul, but its growth runway for the stock is spent for now. 

    Apple, along with the other FAANG's, has been pushed into high valuations mostly because they're the last ones standing.
    While the Fed pumps $120B into the economy each month (most of which ends up on Wall Street) investors have few places to put it.
    -- Cash, Money Markets, short term bonds all carry negative real interest rates -- which guarantees the buyer a loss.
    -- With bond rates held near zero a buyer of intermediate and long term bonds faces massive loss of principle when interest rates go up.
    -- Main Street (and its stocks) is still suffering the impact of the the runaway virus

    That leaves the tech sector as the only viable investment opportunity -- so money pours into it.

    Basically, Jerome Powell has more influence on Apple's stock price than does Tim Cook.

    (None of that is to imply that Apple is not a top notch company -- it is only to point out that its stock price is much higher than it would be under normal economic, fiscal and monetary situations.)
    edited February 25 muthuk_vanalingam
  • Reply 7 of 7
    crowleycrowley Posts: 7,424member
    Pretty crappy dividend too.
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