Are Apple shares worth $250 or more?

Just hours ahead of Apple's latest launch event, one analyst takes on the short-sellers and predicts bigger things for the tech titan. Lee Wild reports.

Apple events are always hotly anticipated and the excitement ahead of today's new product launch is palpable. History tells us that occasions like this are often good for the tech titan's share price, too, but not everyone's convinced. We'll find out who's right in the aftermath of tonight's show 6pm London time.

Watch for updates to last year's iPhone X, with an XS and XS Max rumoured to be ready. There's also talk of a new 6.1-inch LCD model and upgrades to the Apple Watch, and price tags are tipped to increase as Apple seeks to beef up profit margins.

Despite the thrill of new tech, investors have been queuing up to bet that Apple's meteoric rise is over, at least for now. It's reported to be the most shorted stock in the US, with investors 'borrowing' stock to sell in the belief that Apple shares are going lower. They'll buy them back cheaper when they do and bag a profit.

It's easy to see why people are sceptical. Apple shares were changing hands for the equivalent of little more than a dollar in 2003. Fifteen years later and they're near their recent record of almost $230!

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But that overlooks the almost cult-like status Apple has built up among fans over the past two decades. This army of consumers is happy to pay more for aesthetically pleasing products that keep pushing technology to its limits. This has been proved over the years, and Apple is expected to make an operating profit of over $70 billion in the year to September 2018 on revenue of $264 billion, according to analysts at UBS. Look for an increase in earnings per share (EPS) to 11.78 US cents from 9.21 a year ago.

A re-rating is underway, notes the broker, but fundamentals and global weightings remain tailwinds, it says, enough to trigger an upgrade in price target from $215 to $250, implying further upside of over 13% from current levels at around $220.

Source: TradingView Past performance is not a guide to future performance

That target is based on a price/earnings ratio of 16.7x – currently trading on 15.4x - using an average of its EPS forecasts for 2019 and 2020 of $14.20 and $15.83 respectively.

"The stock remains under-owned," says UBS, which points out that Apple remains the top global underweight among active managers. "In our view, investors are not pricing in the potential benefit of a recurring model and future growth from newer markets."

"We expect investors to start recognizing the recurring nature of Apple's hardware business over the next iPhone cycle. Replacement for an iPhone is still an iPhone, as customers are unlikely to leave the Apple ecosystem and would upgrade to a new phone when they are ready, likely every 2-3 years."

UBS is positive on the iPhone cycle for next year, predicting 4% growth in iPhone unit sales to 226.7 million in the 12 months to September 2019. Better-than-expected demand could drive the valuation multiple higher, perhaps to 18x, on 2019 EPS of $15.55. Do that and Apple shares could be worth $280, argues the broker.

On the flipside, if it all goes wrong – iPhone sales stay flat and the two-year upgrade cycle doesn't materialise – Apple could trade on a lower multiple of weaker earnings, implying a share price as low at $180, UBS says.

We'll get a flavour of what might happen after today's event.