Apple, Inc. Has a Major Disconnect Between the Buy-Side and the Sell-Side
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If it wasn't clear by now, investors should always take sell-side research notes with a grain of salt (or more), and they should never act solely based on said research reports. Sell-side analyst opinions are but one of many factors that investors should incorporate into investing decisions. Ironically, that's the takeaway that's underscored in...a recent sell-side research report from UBS.
According to the report (via Business Insider), Apple (NASDAQ: AAPL) actually ranks as the most underweight holding among global fund managers. All around the world, fund managers are allocating less of their portfolios to Apple than their respective benchmark indexes, suggesting that the buy-side doesn't have a whole lot of confidence in the Mac maker's ability to outperform the broader market. Meanwhile, sell-side ratings and price targets are generally quite bullish, with mostly buy ratings and price targets that are well above current prices -- representing significant upside if shares can actually get there.
Consider the fact that analyst price targets on Apple go as high as $185, but average out around $132. With shares currently trading at around $116 and change, those estimates represent potential upside of 60% and 14%, respectively. So what gives?
I don't find your lack of faith disturbing
Not all sell-side analysts are created equal, even if their estimates are included in the consensus forecasts. For example, that Street high price target of $185 comes from Drexel Hamilton analyst Brian White. Over the years, White has covered Apple at several Wall Street firms but almost always maintained the highest price target on the Street. White also seemingly has a fondness for repeating numbers. At various times in the past, he has previously assigned price targets (pre-split) of $777, $888, and $1,111.
White has a pretty mixed track record in terms of predictions. Perhaps the most confounding was the "iRing" that he predicted in 2013 that would accompany an Apple TV set as an interface play that would "revolutionize the TV experience forever." While White is an extreme example, both for some of his outlandish predictions over the years as well as his presumed fixation with having the Street high price target at all times, the bigger point is that the buy side isn't easily swayed by overly bullish forecasts.
Even Piper Jaffray's Gene Munster, who is generally well-regarded within the Apple investment community, has made his fair share of incorrect calls over the years. Munster is leaving Piper to pursue a career in venture capital, but most recently assigned a price target of $155, which his successor analyst Michael Olson is maintaining.
Additionally, keep in mind that the buy-side and the sell-side have completely different incentive structures, which may contribute to the disconnect in sentiment; the buy-side hopes to deliver investment returns (ideally outperformance) to underlying shareholders (earning management fees), while the sell-side hopes to attract the buy-side to trade through the brokerage (typically generating unscrupulous soft-dollar revenue). If you wanted to be a real skeptic, you could also allege that sell-side analysts also hope to earn a covered company's goodwill with positive coverage, which might win some investment banking business (despite the presence of the Chinese wall).
You can't model for sentiment
Beyond product-based predictions, price targets and other financial forecasts are also highly subjective. Price targets are often derived from discounted cash flow models, and then peer-based comparative valuation multiples are subsequently applied. Sometimes a sum-of-the-parts (SOTP) analysis is used.
Even if the revenue estimates prove accurate, there's really no way for analysts to gauge investor sentiment, which directly affects what valuation multiples the market will assign to shares. Simply put, if the buy-side lacks faith in Apple's ability to grow from these levels, then the market will naturally gravitate toward lower multiples than perhaps sell-siders are assigning in their price targets and investment ratings.
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