Shares of Apple (NASDAQ:AAPL) are having a good day, following their 4-for-1 stock split. The stock started trading on a split-adjusted basis today, and shares are up nearly 5% at the time of this writing, highlighting a strong appetite for the hot tech stock's freshly split shares.
While a stock split doesn't technically make an investment more attractive, several analysts are voicing some optimism for the tech stock on Monday. Even more, one analyst is boosting his split-adjusted, 12-month price target for the stock to $150.
How Apple stock could rise to $150
Following the stock's split, Argus analyst Jim Kelleher increased his split-adjusted, 12-month price target on Apple shares from $112.50 to $150. The company's decision to split its stock signals confidence from management in Apple's near- and long-term prospects, Argus says. Further, the analyst notes that the rollout of 5G data speeds will drive a significant upgrade cycle for smartphones, benefiting Apple.
Meanwhile, Evercore ISI analyst Amit Daryanani encouraged investors to stay long on the stock following its split, citing favorable tailwinds for the company toward the end of the year and going into fiscal 2021. Like Kelleher, Daryanani expects strong demand for a rumored 5G iPhone model. In addition, Daryanani believes Apple's services segment will see accelerating growth.
Apple stock isn't the bargain it was
Despite the apparent excitement for Apple stock on Monday, investors should keep in mind that the tech company's 4-for-1 stock split does not make shares more attractive than they were before the split. Sure, the stock can be bought at a fourth of the price of what it would be trading at if it didn't split. But each share's ownership in the company is similarly split in four.
Indeed, the huge interest in Apple stock recently has made shares less attractive. With shares rising 90% on a split-adjusted basis over the last six months, Apple's price-to-earnings ratio has risen from about 20 to nearly 40 today. Investors who are buying the stock today, therefore, have to pay a significant premium for Apple's earnings power compared to the price investors were paying just six months ago.
Sure, Apple has given investors good reasons to pay a premium for its stock recently. Its lucrative services business continues to grow as a percentage of revenue, and Apple's hardware sales held up far better than analysts were expecting during the company's fiscal third quarter -- a period that suffered store closures and weakened demand because of the coronavirus pandemic. Apple's total revenue during fiscal Q3 impressively jumped 11% year over year, with earnings per share jumping 18%.
But are shares undervalued today, as Kelleher's $150, 12-month price target implies? At 40 times earnings, investors would be wise to have low expectations. If anything, the stock may be closer to fairly valued than it is to being undervalued. However, if Kelleher and Daryanani's bullish expectations for 5G's impact on Apple's iPhone business pan out, maybe some investors are underestimating the stock's potential.