Bargain Alert: Apple Shares Are Starting To Look Undervalued

Key Points

• Apple shares have had a tough start to the year and are lagging both the S&P 500 and their tech titan peers.
• Several headwinds have conspired to create an almost perfect storm of negative sentiment.
• However, it's starting to look like the worst-case scenario is priced in, and a buying opportunity could be opening up.

It's been a funny couple of months for shares of Apple Inc NASDAQ: AAPL. Traditionally, one of the market leaders who you could nearly bet would be moving in lock-step with the likes of Meta Platforms NASDAQ: META or Amazon.com Inc NASDAQ: AMZN, this year has seen the iPhone maker's fortunes diverge significantly from its peers. 

Even against the benchmark S&P 500 index, Apple is trailing, with the former's 11% gain since the first week of the year now appearing very attractive against the latter's -9% drop. For context, Amazon is up about 30%, while Meta is in a class of its own with a 50% return so far this year. 

The whole thing raises a ton of questions: Why did Apple have such a poor Q1? Will it continue? When does this become a buying opportunity that is too good to miss? 

Perfect Storm of Negative Updates

Well, for starters, let's consider the headwinds the company has had to face because there have been several. It's true that Apple did manage to catch the initial wave of optimism that swept equities in November and tag a record high in the first half of December; it's been on the back foot since then. A fairly consistent run of negative updates has conspired to send investors running for the door and to keep them away for now. 

The big one is the antitrust lawsuit that was filed against Apple by the U.S. Department of Justice last month, alleging Apple has "violated the Sherman Act by using its iPhone to prevent other companies from offering competitive services." Needless to say, Apple is spooked and said in a statement that if successful, "it would hinder our ability to create the kind of technology people expect from Apple." 

While the current thinking on Wall Street is that the DOJ is unlikely to win the case outright in court and is more likely to result in a fine, it could take years to come to a conclusion. As a fresh negative headwind, it couldn't have come at a worse time for Apple stock. App developers in the European Union are now allowed to bypass the company's traditional 30% cut; Apple has thrown in the towel on its electric vehicle project, which CEO Tim Cook once called "the Mother of all AI projects," and there are signs that unit shipments for the iPhone are starting to look a little soft. 

Buying Opportunity Opening Up

But with shares down 15% from their peak and back trading at 2021 levels, while the S&P 500 powers on to fresh highs, at what point does this turn into an entry opportunity? Well, there are reasons to think Apple shares are already undervalued and due for a pullback.

Consider this: Apple's shares finished last week trading at $169, which is below six of the most recent analyst updates going back to the start of March. Morgan Stanley reiterated its Overweight rating on Apple shares towards the end of March and gave the stock a $220 price target. This echoed the Outperform rating from Wedbush that same week, only the latter giving Apple a $250 price target.

DZ Group and UBS both reiterated their Hold ratings in the last week of March but maintained their price targets at $180 and $190, respectively. Loop Capital also rated Apple a Hold last week but with a refreshed price target of $170. 

Considering Getting Involved

All this is suggesting that we're either approaching, or have very well already gone past the bottom for Apple shares. Short of any further negative updates, these refreshed price targets account for the impact of all the known negative headwinds Apple is dealing with. Depending on your appetite for risk and your belief in Apple's long-term potential, this could be the point at which people say, "The worst-case scenario is already priced in."

Apple is still a beast, and Friday saw Citi name them as one of their top-rated Buy stocks with an estimated 27% return potential. Don't be surprised if that's just the first in a handful of bullish updates in the coming weeks.