Goldman Sachs (ticker: GS) gave Apple Inc. ( AAPL) shareholders an early Valentine’s Day present on Monday, raising its price target to from $133 to $150 per share. Naturally, AAPL stock responded well to the news; shares rose about 1 percent in response to the praise, hitting 52-week highs in the process.
The $150 level represents a 13.5 percent increase from Friday’s closing price of $132.12.
The question is: How realistic is Goldman’s $150 price target?
[Read: The 10 Most Anticipated IPOs of 2017.]
Don’t count Apple out. Apple is coming off a blowout quarter, one that beat nearly all analyst expectations and sent AAPL stock skyrocketing. Shares jumped 6 percent following the fiscal first-quarter results.
A big part of what made Apple’s first quarter numbers so good were the shockingly good iPhone sales numbers, which analysts expected to be very muted following a string of disappointing results in the quarters preceding it.
Point being: just when you count AAPL out, the company shows it still has a trick or two up its sleeve. And if Goldman’s right, Apple’s greatest tricks are yet to come.
Goldman’s thesis. The bottom line is that Goldman expects big things from the iPhone, the 2007 invention that quickly became Apple’s best-selling product, transformed the business, and turned it into the most valuable company in the world.
Last quarter alone, AAPL sold over $54 billion worth of iPhones, setting a company record and accounting for nearly 70 percent of Apple’s overall sales.
But Goldman expects the iPhone 8 to be a major improvement from the iPhone 7, seeing as this will be the 10-year anniversary of the first model.
Apple has been roundly criticized for not making meaningful changes from one iPhone model to the next, but this time, the tech community will be expecting something big.
“The iPhone7 didn’t offer the upgrade that many consumers were looking for, but the next model is rumored to be packed with several new features. I am not sure about $150 as Goldman Sachs suggests, but extending to $143, Bloomberg’s 12-month consensus target price might not quite as far fetched,” says Chris Kim, senior vice president and chief investment officer at Tompkins Financial Advisors, based in White Plains, New York.
Goldman specifically expects the iPhone 8 to come with a “3D sensing functionality” that would “enable a robust augmented reality feature set that we believe will be a key differentiator.” Apple insiders have hinted before at AR and virtual reality would be major points of focus for AAPL going forward, and following the huge success of games like Pokemon Go in 2016, any iOS or phone manufacturer that makes AR easy to develop for and play with has the potential to be richly rewarded.
Not only that, but Goldman thinks the iPhone 8 will have an OLED display, allowing for the removal of the home button entirely. Some have suggested the iPhone 8 will be the first iPhone with the ability to charge wirelessly as well, would be a huge step forward.
“The phone is speculated to have some nice features that are more function than form, which tends to draw in more upgraders than normal,” says Peter Karazeris, an analyst with Thrivent Financial in Minnesota.
Last and perhaps most importantly, Goldman expects the iPhone 8 to have three SKUs: the current 4.7″ model, the current 5.5″ model, and the yet-to-be-released 5.8″ model.
The reason this additional 5.8″ model would be so great for AAPL, as you might have guessed, is because it’d be more expensive than the other two, raising the average selling price for all iPhones sold and boosting the top line.
Currently the 4.7″ model goes for $649 and the 5.5″ model goes for $769, so seeing an average selling price at or near $800 a pop for the largest model seems quite reasonable.
But Goldman needs more than just chatter about the long-anticipated 10th iPhone anniversary to justify its $150 price target for AAPL stock.
The Wall Street bank does that by raising its projected iPhone sales for 2017 from 227.3 million phones to 230 million. For 2018, it increased its forecast from 231.5 million phones to 235.9 million.
[Read: 5 Reasons Donald Trump’s Presidency Will Include a Recession.]
More importantly, Goldman is raising the earnings multiple it believes AAPL stock deserves from 14 to 16, making each dollar of earnings worth 14.3 percent more than it used to. Earnings multiples usually rise when greater growth is expected from a company in the coming years than there was previously, so a slight boost in Apple’s multiple makes sense.
The consensus earnings per share estimate seen by most Apple analysts on the Street calls for $8.95 in fiscal 2017; multiply that by 16, and you get a price target of $143.20. Goldman must be far more sanguine on its fiscal 2017 projections than most on the Street, however, as a $150 price target calls for EPS of $9.37.
Why AAPL can hit $150. It might sound like a bit of a stretch that a company as large as Apple could grow its market capitalization by 13.5 percent over a short period of time, but price targets are typically given with the understanding that there will be 12 months for them to play out. Given the fact that the market itself has risen 25 percent in the last 12 months, 13.5 percent over the next 12 months isn’t too much of a stretch.
Plus, Apple is blessed with a hoard of more than $200 billion in cash, $31 billion of which is greenlighted to be spent buying back AAPL stock. That should give share prices an extra boost and help lift earnings per share figures.
Finally, you never know how market psychology will play into share prices, and the de-regulatory, anti-tax nature of the Trump administration has certainly been applauded by Wall Street.
“The only upside remaining to $150 or $170 has to come from the tax benefit of Apple’s large foreign capital repatriation, which is not counted into the most target prices,” says K C Ma, professor of finance at Stetson University.
It’s probably not factored into most models because the U.S. reducing or doing away with the repatriation tax is by no means a done deal, although it is possible. Apple has more than $180 billion in cash overseas.
Why to be cautious. So while $150 is by no means an unreasonable level for AAPL stock at some point in the next year or so, there are some longer-term concerns that investors should be aware of. The most pressing issue is probably Apple’s blatant lack of innovation: Since Steve Jobs died, the only new product Apple’s come out with was the Watch, a product that isn’t successful enough to be broken out as its own line item and is considered by many to have been an abject failure.
[See: 7 of the Best Stocks to Buy for 2017.]
If Apple continues to shun innovation and rest on its laurels, multiples will have to come back down to earth; the iPhone is an amazing product, but it can’t carry AAPL stock forever.
More from U.S. News
The 25 Best Blue-Chip Stocks to Buy for 2017
7 Best Tech Stocks to Buy for 2017
Artificial Intelligence Stocks: 10 Companies Betting on AI
Is Apple Inc. (AAPL) Stock Really Worth $150? originally appeared on usnews.com
