Apple outlook as stock split takes effect on Monday

Jim Suva, Citi Research Analyst & Managing Director, joins Yahoo Finance's Zack Guzman to discuss what Apple's pre-announced stock split means for investors.

Video Transcript

ZACK GUZMAN: Jim, I mean, you got a buy rating on Apple, price target of 450. We're of course above that now, just because the stock's been on quite the run here.

I guess we'll start this discussion on the planned stock split that's going to go into effect on Monday. And when we look at that, it shouldn't really have an impact on the fundamentals for Apple. But when you look at research from Susquehanna, it does seem that Apple does benefit from stock splits one month ahead, averaging about a 15% gain and then a 9% decline in the 33 days after. But what's your take on maybe how hot Apple's been right now, what investors should be thinking about?

JIM SUVA: Well, Zack, it's great to see you again, and perfect observations and good questions.

So first of all, let's take a stock split and break it into two parts. First, fundamentals, as far as valuation, and second, economics. For the fundamentals valuation, if you gave me five single $1 bills, and I gave you a $5 bill, that really didn't create additional wealth in my pocket or your pocket.

However, when we look now at the economics of supply and demand, it does bring more demand to the stock by the marginal retail investor. Yes, there are brokers that do sell fractional shares, but it's not all out there and all the companies can do this. So if you're thinking about, for your children or grandchildren or nieces and nephews, of giving them a share or two or three of stock for a holiday gift or graduation, you can give them a full share now, and it just makes it better.

So we believe, again, it doesn't really create value. Again, five $1 dollar bills equals one $5 bill, doesn't change your net wealth. However, the supply and demand dynamics do bring a marginal retail investor in. And that's a positive. Now, we've got to sit back and say, well, geez, a lot of the market cap of $2 trillion is institutional, which is true. But simply put, it doesn't hurt. It does help marginally.

ZACK GUZMAN: When we talk about room to run, I say you think that Apple has room to run, because it got a buy rating. But your price target is about $50 below where we're seeing shares trade right now. And on that topic, I mean, you used to have the highest price target here. We've seen a few analysts come out and boost their price targets. Earlier this week, Wedbush's Dan Ives joined those ranks, boosting his price target to $600 a share.

So when you think about catalysts ahead here, what really do you think investors should be focusing on? Because we've seen analysts on the other side actually moving in the opposite direction, downgrading Apple, noting that they could be wrong in terms of how big of a boost will come from this next cycle of 5G phones. So what's your take on catalysts?

JIM SUVA: Well, you're right. My $450 target price is below the current shares, simply because as you pointed out, Apple stock, and as you've seen on the stock charts, has had a tremendous tear going up and to the right.

Now, that being said, if we turn back the clock, yeah I, was very high with that target price. And people are calling me nuts, and crazy, and go get a college degree. Well, I've got a MBA degree from University of Chicago and things like that, and a licensed CPA. So a lot of people thought I was nuts. And now the question is, as you correctly said, what's next?

And simply put, it's going to be the launch of the iPhone 12, where the company mentioned it's going to be a few weeks delayed, not months, but a few weeks. So we expect that to come out in October. And then we look through for sell-through through that. Things like the AirPods that I'm using right now and you're using right now are catching on more and more. There'll be some additional enhancements on the iPhone 12, 5G. People working from home have realized, a good phone, a good camera, a good battery, is really, really helping your personal net wealth and productivity to be able to work remotely.

So to directly answer your question, what's ahead for Apple? We believe the iPhone 12 launch in October is the next catalyst beyond the stock split that we're seeing currently.

ZACK GUZMAN: When we talk about just how high the expectations might be here, though, on that next product launch cycle here, is there any risk to the downside, just because of how high expectations might be? Bank of America noted that, as I said in their downgrade, just saying how high it is-- it's at a 10-year high relative to the index when you look at Apple shares right now.

And also, beyond that, I wonder if there's any risk to the idea that maybe Americans caught in tough economic decision, or position, rather, right now, might put off their upgrade, just because we've seen these things kind of slow down in positions like this. So what's your thinking around how that might happen on this product cycle and whether or not it's going to be compelling enough to see people upgrade?

JIM SUVA: You're right. Expectations are something we keep an eye on. Six months ago, the view was that they may completely miss Christmas because the supply chain was coming to a halt. And so the pendulum has shifted from negativity and value to positiveness and a shift on apps and services, as well as beyond the iPhone. So we do believe they'll hit Christmas, and it'll be a strong present.

That being said, remember, they did launch the iPhone SE. So it's opening up some newer markets, some newer price points that typically wouldn't necessarily have the discretionary income to be able to afford the newest iPhone.

With that being said, also, you think about Apple Watch, and going into health care, opening up new opportunities. If an elderly person falls down, it can detect a shock and call you and say, hey, your grandmother or grandfather hasn't moved in 15 minutes, and there was a shock. Check in with them to make sure they're OK. In the past, that would be an emergency phone call or having the ambulance come, or some very expensive measure. Apple is now getting into health care and some more exciting opportunities.

So that's where we think you've got to look for the balance of near-term expectations versus longer-term opportunities of really unlocking some of these new opportunities. We think health care could be very big. I wear my Apple Watch a lot. It detects my heart rate. In the future, it will detect a lot more. And that potentially can help with health care costs and help better society, and we find that quite encouraging.