(Bloomberg) -- Apple Inc.’s services business should help drive long-term upside in the stock, while the iPhone will likely serve "as an annuity," Cowen said, starting coverage with a buy-equivalent rating.
Shares rose as much as 1.3 percent, putting the stock on track for its fifth straight positive session, its longest such streak since one that ended Feb. 6. At current levels, Apple is trading at its highest level since early December.
“We view the Services business as an investable long-term theme as EPS contributions can double to $6 by fiscal year 2021, and increasing recurring revenues should drive a higher multiple,” analyst Krish Sankar wrote. The firm sees Apple “massively monetizing its installed base of products and charging for value added options (possibly including Siri) down the road.”
While Apple has rallied nearly 30 percent off a January low -- reached after the company cut its revenue outlook -- the stock remains more than 20 percent below record levels hit in October. Much of the weakness has come on concern over the demand for the iPhone, particularly in the critical China market. On Tuesday, Longbow Research wrote that the product’s demand trends were going “from bad to worse.”
Cowen noted that smartphones were “a mature market” and that “a lack of revolutionary innovation and mispricing have led to well publicized iPhone challenges.” However, the firm added that given an installed base of 900 million units and the oldest devices approaching five years old, “annual iPhone shipments are running near replacement demand,” which was “potentially a supportive long-term annuity for device sales.”
According to Bloomberg data, Apple’s services business accounted for 15 percent of the company’s 2018 revenue, which made it a distant second behind the iPhone, at more than 60 percent.
Cowen’s initiation at outperform -- with a $220 target -- brings the number of buy-equivalent ratings on the stock to 23, according to Bloomberg data. BofAML upgraded the stock to buy on Monday.
Another 22 view the stock as a hold while just one firm has a sell rating on the stock. The average price target is $178.71.
(Updates to market open, adds context on services in sixth paragraph.)
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