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Apple shares could fall as low as US$120 after shock warning, claims RBC

Apple shocked the market with its surprise guidance cut on Wednesday night, and RBC reckons history implies support for the stock might not be found until it falls to around US$120

iphone x
The analysts argue that a more likely support is around the US$140 level

Apple Inc (NASDAQ:AAPL) shares took a beating in after-hours trading in New York after the tech giant slashed its guidance – something it almost never does.

The iPhone maker had expected to generate revenue of around US$91bn in the final quarter of 2018 but said late last night that that figure will be nearer to US$84bn.

Chief executive Tim Cook highlighted a number of pain points, including sales in China, which have been affected by tensions surrounding the ongoing US-China trade war.

READ: Apple warns 1Q earnings will miss forecasts

The stock dropped almost 8% to US$146 overnight, but analysts at RBC Capital think the fall might have a little way to go yet.

“The stock after hours is trading around US$146 and we are modelling AAPL’s EPS to be ~$12 in FY19,” read a note to clients.

“Historically, the stock troughed around early-2013 period at ~9-10x P/E that would imply the support would be closer to US$120.”

“Though we would note AAPL did not have a strong capital allocation program at that point, which should provide better valuation support. Assuming 10x is the support this time around (ex-cash) it would peg the support for the stock at US$140.”

If RBC’s bear case scenario plays out, Apple shares would hit levels not seen for two years. Even the mid-case scenario – US$140 – would see the stock sink to 18-month lows.

Silver linings…

Despite slashing their price target for the stock to US$185 from US$225, the Canadian investment still has Apple at ‘outperform’ and highlighted a few silver linings in Wednesday’s announcement.

“Non-iPhone revenues were up +19% y/y led by strong services and wearables, and implying iPad and Mac were flattish.

“AAPL services continued to outperform expectations, generating US$10.8bn in revenues or up +28% y/y and install base increased by 100mln users in the last twelve months. Wearables also posted very strong growth of +50% y/y led by Apple Watch and AirPods.”

Quick facts: Apple

Price: $213.76

Market: NASDAQ
Market Cap: $965.88 billion
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