Sacconaghi: Apple’s stock price reflects ‘fantastically pessimistic assumptions’

Bernstein's top Apple analyst joins the chorus questioning the stock's dismal valuation

Last week, Morgan Stanley's Katy Huberty noted that Apple's (aapl) current stock price suggests that the market is expecting the company's earnings to grow minus 2% in perpetuity. (See here.)

In the first of a two-part series, Bernstein's Toni Sacconaghi on Monday drilled a little deeper into that -2% growth rate and found a series of what he calls "fantastically pessimistic assumptions." Keying in on the iPhone, Apple's single largest source of revenue, he wrote that for the company to grow -2% after 2012, either...

  • The iPhone would have to lose three-quarters of its market share over the next three years, with sales falling from an estimated 116 million units in 2012 to 45 million in 2015
  • Or Apple's gross margins would have to drop more than 1,000 basis points, from an estimated 41.3% in 2012 to 30.9% in 2015, while gross margins on the iPhone fell 2,000 basis points

"What makes Apple's valuation truly astonishing to us," Sacconaghi writes, "is that the iPhone and iPad -- which together drove 87% of its revenue growth and an estimated 91% of its profit growth last year -- are exposed to secular tailwinds."

In other words, the company is growing like gangbusters, not shrinking like its current P/E ratio would imply.

All products and services featured are based solely on editorial selection. FORTUNE may receive compensation for some links to products and services on this website.

Quotes delayed at least 15 minutes. Market data provided by Interactive Data. ETF and Mutual Fund data provided by Morningstar, Inc. Dow Jones Terms & Conditions: S&P Index data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Terms & Conditions. Powered and implemented by Interactive Data Managed Solutions