Apple Inc. (AAPL) has certainly caught sexier Wall Street commentary, but an analyst lifted his price target on Apple stock Monday as the market comes to realize that it doesn’t give an important business segment enough credit.
Credit Suisse’s Kulbinder Garcha, who raised his price target to $150 from $140 and added AAPL to the firm’s U.S. focus list. The analyst already has an outperform rating (buy, essentially) on Apple stock.
His new price target means the Apple stock price has an implied upside of 34% in the next 12 months or so. That’s on the high side of estimates, but even the average target price of $134 leaves an implied upside of 20%. Taken as a whole, the Street consensus on AAPL is that it’s a buy.
Now comes the important part.
Credit Suisse believes that the market is underestimating the gross profit contribution from Apple’s services division and “underappreciates its growth potential and the annuity-type business it drives in terms of retention and replacement across the business.”
Bullishness on the services business, which includes everything from iTunes to Apple Pay, is fashionable these days because AAPL disclosed revenue figures for the first time just a few months ago. In fiscal 2015, services grew 10% to nearly $20 billion.
It’s a great earner for Apple because it isn’t tied to the ups and downs of quarterly gadget sales. Rather, it compounds as people buy more Apple devices. Customers use the iCloud, Apple Music, whatever, long after Apple makes the initial sale. With an install base of a billion active users, you can see how services offer a large, material contribution to earnings.
Apple Stock Won’t Stay Cheap for Too Long
Here’s a breakdown of what the services business can do from Credit Suisse:
“First, we note an installed base of over 1 [billion] active devices, and almost 600 [million] unique users that are highly affluent and ‘transacting’ (accounting for 66% of mobile commerce, spending 7 [times] more than Android users). Second, we see a Services spend per user accelerating to $113 in 5 years from $61 today, as uptake of service offerings including scale from Apple Pay, Apple Music and iCloud, takes hold and download revenues stabilize. Third, we see new service opportunities in the TV/Video market. “
Apple made figures from services available to reassure investors who are worried about flagging iPhone sales, and it was a good move. No, nothing can replace the iPhone — it accounted for more than two-thirds of sales in the most recent quarter — but it helps dispel the view that AAPL is a one-trick pony.
Credit Suisse’s report to clients is just another step in the process of the market coming to terms with the fact that it has overly discounted AAPL — and by a lot.
Sentiment on Apple stock is starting to rebound after a long period of decline. Indeed the Apple stock price is up about 6% for the year-to-date. That beats the S&P 500 by almost 5 percentage points.
Apple stock is still a buy at current levels on valuation alone, but it may not be for too much longer. Reassessments of the non-iPhone segments and mounting excitement for the autumn launch of the iPhone 7 have shares catching up to a fair valuation in a hurry.
The bottom line: Buy AAPL stock before it’s too late.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
