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Apple stock analysts are out of touch with reality

Brian Sozzi

Wall Street’s ongoing infatuation with Apple’s stock, as seen in still sky-high sales and profit estimates, are out of touch with the harsh realities facing the iPhone maker.

It’s as if Wall Street continues to be blinded by the company’s strong track record rather than the unfortunate news flow of the past few months. And it could equate to more pain for investors hoping for the best when Apple reports fiscal first quarter earnings on Tuesday.

Remember, Apple said on January 2 that first quarter revenue will be about $84 billion. That was sharply lower than previously anticipated $89 billion to $91 billion. Apple CEO Tim Cook attributed the reduced guidance to weakness in emerging markets and in Greater China as well as supply constraints on new products. Cook also hinted strongly that Apple felt resistance from consumers to the new $1,000-plus iPhone XS line.

Although Cook tried to hype strong demand in AirPods and Apple Watches, investors weren’t buying it at the time. They still haven’t bit on Cook’s hype job, either.

Apple is the the worst-performing tech stock in the S&P 500 this year. Shares of the Steve Jobs creation are unchanged this year, badly lagging the Dow Jones Industrial Average’s 7.5% gain.

In effect, investors have seemingly bought into the notion that there are better bargains in the globally exposed Dow than Apple. Indeed that’s telling as to the outlook for Apple’s all-important iPhone business, which is feeling the heat from competitors such as Samsung and consumer resistance globally to higher prices. Keep in mind that given Apple ‘s $100 billion-plus in cash, the stock is hardly expensive at 11.8 times forward earnings.

Or is it?

Apple, by the numbers

The Apple logo is displayed at the Apple store in the Brooklyn borough of New York, Thursday. (AP Photo/Mary Altaffer)

Unfortunately, Wall Street hasn’t gotten the memo that the Apple of 2019 is vastly different than the Apple in the past five years. Despite the jaw-dropping sales warning in January, out of the 49 Wall Street analysts who cover Apple, 50% still rate the stock a Buy. The other 50% rate it a Hold (always a lame call). There are no sell ratings on mighty Apple. Average price target on Apple among this group: $176, estimating 12% upside potential over the next 12 months.

Although analysts have slashed their profit forecasts for the first quarter (by 11% in the past four weeks), most have been reluctant to take deep cuts to their fiscal year 2019 estimates. Revenue and operating profits for the full fiscal year and in the past four weeks have only dropped by 9.3% and 9%, respectively, mostly reflecting markdowns for the first quarter.

In other words, Apple analysts expect the company to regain momentum later this year on the back of a multitude of unknown products. That’s a hard sell based on the January announcement and global growth slowdown.

“We think the Street has not fully factored in the repercussions of the [revenue] miss into fiscal year 2019 estimates,” cautions long-time Apple analyst Gene Munster at Loup Ventures. Munster is full 3 percentage points below Wall Street’s full-year sales forecast on Apple of down 2%.

So in the end, Apple’s stock may actually be expensive right now based on what analysts are estimating.

The bottom line

Many analysts on Wall Street share Needham analyst Laura Martin’s thesis on Apple. “We believe Apple is one of the cheapest ways to participate in the global shift toward mobile devices and we would underscore its extraordinary earnings power as a global platform.” Bullish investment theses such as that will be put to the test this week as Cook hops onto an earnings call and tries to explain what he is doing to recover from a more than $5 billion quarterly revenue whiff.

Good luck, Apple perma-bulls.

Brian Sozzi is an editor-at-large at Yahoo Finance. Follow him on Twitter @BrianSozzi

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