Apple Stock Rises as Bernstein Says ‘Buy the Fear’

Apple stock (NYSE: AAPL) rose nearly 2.5% yesterday after Bernstein which had a “market perform” rating on the stock for nearly two years upgraded the stock to “outperform” while maintaining the target price at $195.

Bernstein analyst Toni Sacconaghi advised investors to “buy the fear” in the stock after the iPhone maker’s YTD underperformance.

It is a welcome upgrade for AAPL after the company faced a flurry of downgrades in January. While it’s quite a rarity for brokerages to downgrade Apple, several analysts have been apprehensive about the company amid fears of it losing market share in China, its largest market outside the US.

Bernstein Upgrades AAPL

In his client note, Sacconaghi said, “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.”

He added, “We further believe that replacement cycle tailwinds and incremental generative AI features set up Apple well for a strong iPhone 16 cycle.”

Notably, Apple has teased AI-related announcements for later this year and JPMorgan believes that AI-enabled handsets could trigger a massive replacement for iPhones – similar to the 5G supercycle.

Warren Buffett’s Berkshire Hathaway is the second-largest Apple shareholder

Sacconaghi also said that investors should follow Warren Buffett’s lead whose Berkshire Hathaway is AAPL’s second largest shareholder.

“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,” said Sacconaghi.

He added, “We would encourage investors to follow suit, adding to positions on Apple when the multiple is 25x earnings or below, and trimming at 30x+.”

Notably, Buffett trimmed his holding in Apple in Q4 2023. Previously, he admitted that selling Apple shares in the past was a mistake. He has praised Apple multiple times in the past and has also been supportive of the company’s massive stock repurchases.

Jim Cramer Does Not Buy Bernstein’s Optimism

Meanwhile, Jim Cramer is not buying Sacconaghi’s optimism towards AAPL and said, Unlike Toni, I want you to own Apple, not trade it, even as I suspect this quarter will be weak and the next quarter will be worse.”

He however added, “But I’m with him that you should buy the stock — I just think you need to wait it out, because now you’ve got a Sacconaghi spike on top of what could be a bad quarter.”

AAPL Stock Has Underperformed

Apple was the worst-performing “Magnificent 7” stock last year and is among the worst-performing tech names this year also amid slugging iPhone sales. The company is no longer the world’s biggest company and lost out the title of Microsoft.

One of the key reasons iPhone sales have sagged over the last year is that AAPL is battling intense competition in China whose economy has anyways slowed down. Huawei has especially emerged as a key competitor for Apple as the company has continued to thrive despite US sanctions.

It recently launched the Pura 70 series of smartphones that would compete directly with the iPhone 15.

Apple is Focusing on Other Asian Markets

While Apple is betting on markets like India to offset the slowdown in China, the country might not be immediately able to fill the gap.

Budget handsets continue to dominate the Indian market with Samsung being the market leader. The bulk of the market is however with Chinese companies despite the ongoing troubles between the two neighbors who share a long and disputed border.

Low per capita income in India makes iPhones out of bounds for the majority of its 1.4 billion strong population.

The structural US-China tensions are also prompting the iPhone maker to diversify its supply chain and reduce its reliance on China. India and Vietnam are among the Asian markets from where Apple is increasing its sourcing.

Last year Apple opened its first two retail stores in India – a sign of the country’s growing importance. Apple has gradually increased sourcing from India and in the last fiscal year, 14% of its iPhones were assembled in the country which was twice the previous year.

Meanwhile, markets now await AAPL’s upcoming earnings later this week for more insights on the sales trajectory of iPhones, especially in China.