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Apple Had a Huge Quarter. Why the Stock Is Down Anyway.

Consumers appear to be more attracted to the more expensive versions of Apple’s latest iPhones than the cheaper ones.

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Apple  produced a stunning result for the latest quarter, beating Wall Street’s expectations for every major product line, with particularly sterling figures for the iPhone. And yet the stock is in the red, even as the S&P 500 jumps.

The company had double-digit growth in every product category, with record revenues in every geographical market. It reported a huge rebound in sales in China, and achieved gross margins that were more than a full percentage point higher than expected. The company continues to repurchase vast amounts of shares: Facebook (ticker: FB) announced a $25 billion buyback program on Wednesday, but Apple bought back that much stock in the December quarter alone.

And yet the stock on Thursday was down, while the S&P 500 was up 1.7%.

The decline came despite glowing reviews for the quarter from Wall Street. Barron’s counted at least 16 analysts raising their targets for Apple’s stock price, and we may well have missed a few.

It would seem that the spectacular run up in the stock has at least temporarily exhausted investors. Apple shares doubled from the end of 2019 at $72.78 to the midday peak on Wednesday at $145.09, adding more than $1 trillion in market capitalization in the process. The business is certainly having a stunning moment, but the price may be a wee bit ahead of the fundamentals.

Bernstein analyst Toni Sacconaghi pointed out in a research note that Apple in the quarter handily beat expectations for both revenue and earnings per share. He is certainly right about that. Apple posted revenue of $111.4 billion, up 21% from the year-earlier quarter, and profits of $1.68 a share. The results crushed the respective Street consensus forecasts of $102.8 billion and $1.40 a share. That was driven by $65.6 billion in iPhone revenue, up 17% from a year earlier, and $6 billion ahead of the Street consensus view.

Sacconaghi said he was struck by consumers’ preference for the higher-priced Pro and Pro Max versions of the iPhone 12. That drove up both iPhone revenue and the company’s gross margins because the fancier phones are more profitable. He also cited “the uniform strength across all hardware products, as Apple benefited from reallocated consumer spending dollars during the pandemic.”

But Sacconaghi remains cautious. While he moved his target price up to $132, from $120, he kept his Market Perform rating on the stock. “Apple has had a tremendous run, and trades in line with large tech companies with higher growth rates,” he wrote. “At 34 times consensus 2021 EPS, more limited opportunities for upward revisions post the first quarter and, the company facing very tough comps and a more muted iPhone cycle next year, we struggle to see the case for material outperformance from current levels.”

Many other analysts disagree.

Jefferies analyst Kyle McNealy repeated a Buy rating, while raising his price target to $160, from $140. “We think the Street still underappreciates Apple’s opportunity with 5G,” he wrote. “In our view, there’s much more to come as we’re only in the initial innings of Apple’s 5G adoption cycle.” And he thinks the 5G shift will drive continued strength in both the Wearables and Services segments.

Brian White, with Monness Crespi Hardt, repeated his Buy call and took his target price up to $170, from $144. “Apple’s strong balance sheet, iconic brand, rapidly growing services business, pipeline of innovations and hardline stance on personal privacy will allow the company to emerge from this crisis stronger,” he said in a research note.

Raymond James analyst Chris Caso made a similar point—that the 5G iPhone cycle will last for a while, and that it will benefit Apple’s other businesses.

“The company delivered on all fronts, including iPhone, Macs, wearables and services,” Caso wrote. “And a richer iPhone mix had the benefit on margins that we had expected. While Apple delivered on this cycle, we’ve long considered this to be a 2 year 5G cycle, with better global 5G coverage providing greater incentive for upgrades, along with what we expect to be a new form factor.”

He said he expect the services business to benefit as Apple sells more devices, increasing the number in use, and adds new service offerings.” He kept an Outperform rating on the stock and raised his target for the price to $160, from $150.

Playing off the news of the short squeeze in GameStop stock (GME), Evercore ISI Amit Daryanani said in his review of the quarter that there is “no need for Reddit mentions with performance like this.” He said the company’s prediction of a seasonal decline in revenue from the December quarter doesn’t reflect an easing of the Covid-19 crisis, or the arrival of additional stimulus checks.

Both factors could be “sizable drivers” for gains, Daryanani said.. And he noted that the company not only produced higher-than-expected gross margins but said they would sustain the new level in the current quarter. He repeated his Outperform rating, while moving up his target price to $163, from $160.

But maybe in fact Apple could use a few Reddit mentions. Shares were down about 2%, to $139.28 on Thursday.

Write to Eric J. Savitz at [email protected]

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