Bernstein upgraded shares of Apple on Monday, saying they had fallen too far on fears of sluggish iPhone 15 sales and overall weak revenue in China. The firm, which has been on the sidelines for Apple with just a market perform rating for more than two years, advised investors to "be like Buffett" and scoop up the shares while they are cheap.
"Despite his reputation as a long term buy and hold investor, Warren Buffett has been remarkably disciplined at adding to his Apple position when it is relatively cheap and trimming when it is relatively expensive," analyst Toni Sacconaghi wrote in a note. "We would encourage investors to follow suit, adding to positions on Apple when the multiple is 25x earnings or below, and trimming at 30x+."
Bernstein upgraded Apple to outperform from market perform and kept its $195 price target, representing 15% upside from here. The stock is down 12% this year, compared to a 6.9% gain for the S&P 500, over fears that it is losing market share in China amid further restrictions by the government there.
Buffett's Berkshire Hathaway is the largest active shareholder in Apple, and the tech stock represents one of the investing great's best picks ever since Berkshire started buying in 2016.
Bernstein notes that following this year's losses, Apple is trading at a price to earnings ratio of 26.4 based on its 2024 earnings estimate and just 22.9 times its 2025 estimate. Bernstein displayed a table in the note to clients that shows Buffett tends to trim the shares when its price to earnings ratio gets above 30 and he buys more during quarters when the valuation is around the current range.
Other reasons for upgrade
Besides being cheap, Sacconaghi listed several other reasons for the change in his opinion after keeping a market perform rating on the shares since at least January 2022, according to data in the note.
"We believe prevailing weakness in China is more cyclical than structural, and note that historically Apple's China business has exhibited much higher volatility than Apple overall, given its very feature-sensitive installed base," stated the analyst. "We further believe that replacement cycle tailwinds and incremental generative AI features set up Apple well for a strong iPhone 16 cycle."
Sacconaghi's upgrade note, which he titled, "Buy the fear," comes before Apple reports earnings Thursday evening.
"Tactically, expectations are low entering Q2 results, with ~$80B in revenue guidance for FY Q3 (vs. consensus of $83.4) seemingly the bogey," stated the note.
Bernstein also cites that history shows it pays to buy Apple shares in the three months ahead of a new iPhone launch, noting that the stock has outperformed in 15 of those past 17 periods. Bernstein expects iPhone 16 to be out in September.
The analysts says risks to his buy call include a deterioration in U.S.-China relations, leading to more restrictions on iPhones by the country, and if the new iPhone has disappointing artificial intelligence features.
