There has been much talk about the most important factor in Apple’s new success – the iPhone 12 chip. It is expected that a large part of Apple’s global fan base will switch to the new 5G-enabled phones in the next few years.
However, J.P. Morgan analyst Samik Chatterjee says expectations may be a little too optimistic.
“While reviews point to solid demand for 5G iPhones, especially with the lengthening lead times for the iPhone 12 Pro, the upside potential for aggregate volume expectations appears to be limited compared to buy-side expectations, which are set for a strong 5G cycle,” the analyst said.
Looking ahead to the new year, Chatterjee dampens investors’ expectations that Apple stock will deliver the same returns investors have become accustomed to over the past few years. The analyst says shareholders should expect “modest returns in 2021”.
This is not to say that Chatterjee believes Apple’s problems are deeper than that. Those “modest returns” are in the 20% range (compared to 74% earnings this year). Moreover, the analyst believes there are other reasons for optimism.
In contrast to lowered 5G expectations, reviews “point to better consumer demand for older iPhones (especially iPhone 11),” and there are ” tailwinds for Mac/iPad and lots of evidence of strength in wearables.”
The latter in particular could be a source of upside potential in the coming 2021.
“Recent promotional activity, as well as consumer preference regarding the Apple Watch and AirPods, suggest that consensus estimates for the wearables segment are being revised upwards,” Chatterjee said. “For example, the latest IDC forecast estimates that Apple Watch volume will grow +20% year-over-year in CY21, a mid-to-high single-digit increase over the forecast earlier this year.”
Overall, Chatterjee reiterated his “overweight” (i.e. “buy”) rating on Apple shares along with a price target of $150, implying an upside potential of 18% from current levels.
Where do most market participants stand on Apple? It appears to be mostly bullish. The consensus Moderate Buy rating on Apple is based on 30 ratings, split into 23 Buy, 6 Hold and a single Sell. However, the majority expect the stock to remain in a range for now, as indicated by the current average price target of $131.88.