Apple (AAPL) reported fourth-quarter earnings that bested analyst expectations on Wednesday, as a result of strong performance in services and its fast-growing wearables business. Although Apple’s iPhone business was down 9% year-over-year, the company signaled that it expected a substantial holiday quarter, and Apple stock climbed more than 1% in after-hours trading.
“Look, I think the company is executing well and I think as you have all noted there is a market rotation towards quality, and quality is fortress balance sheets, quality is predictability of earnings and margins, and Apple exemplifies that. And so I think a combination of good broad-based execution at Apple, and kudos to them, as well as market receptivity for high-quality technology and names in general, in the tax base as well, has led to real strength in the name,” said Toni Sacconaghi, senior hardware analyst at Bernstein, on CNBC, who raised his price target to $250 from $225 on Apple after its strong earnings.
Despite Apple’s strong performance however, Sacconaghi, a highly respected analyst, feels that the tech giant is overvalued in terms of performance metrics, and so investors need to be careful buying it at these levels.
“Well look I think there are two things at play here. One is, if you look to the valuation of Apple, it’s comfortably at a five-year high on all relative metrics. If you look at the last five years, which has been sort of the post hyper growth period for Apple, it trades at .8 times the market multiple. Right now it’s trading at 1.05 times a market multiple. So it’s 25% more expensive than it has been on average, and that’s pretty similar whether you look at it on a cash flow basis or on an earnings basis relative to the market. So they’re enjoying good things, but the stock is being rewarded for that. And I think one needs to be careful, more careful, when valuations are at elevated levels,” he added.
Sacconaghi is concerned by the strength of the current iPhone cycle, which has punished the stock in the past during times of weakness. He doesn’t think we are necessarily out of the woods yet, or know this might not be a weak cycle. This year average selling prices will be down 5-10%, potentially driving revenues down, he said.
For investors in favor of higher Apple prices, the following ETFs offer healthy allocations of the tech behemoth:
- Technology Select Sector SPDR ETF (NYSEArca: XLK): tries to reflect the performance of the Technology Select Sector Index, which is comprised of technology and telecom sector of the S&P 500. The ETF includes companies from technology hardware, storage, and peripherals; software; diversified telecommunication services; communications equipment; semiconductors and semiconductor equipment; internet software and services; IT services; electronic equipment, instruments and components; and wireless telecommunication services.
- Fidelity MSCI Information Technology Index ETF (FTEC): tries to reflect the performance of the Nasdaq-100 Technology Sector Index, which consists of companies in the Nasdaq-100 Index classified as technology according to the Industry Classification Benchmark. QTEC currently holds 34 components and more-or-less equally weights its holdings.
- iShares U.S. Technology ETF (NYSEArca: IYW): reflects the performance of the Dow Jones U.S. Information Technology Index, which includes all tech sector picks in the Dow Jones U.S. Index. Due to the Dow Jones’ classification of information tech names, healthcare technology stocks may be included while payment technology stocks are excluded.
For more market trends, visit ETF Trends.