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Apple Analysts See Services Potential But Want More Detail

Jeran Wittenstein and Ryan Vlastelica
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Apple Analysts See Services Potential But Want More Detail

(Bloomberg) -- Apple Inc. analysts are cautiously optimistic about the company expanding its services business, a move they see as offering long-term growth potential. However, Monday’s big media event was seen as lacking key details, and even bulls say it will take a few years for the products to have a material impact on revenue or earnings.

The company unveiled a video-streaming service and a credit card, among other initiatives, as part of a plan to build out its service offerings at a time when sales for its iPhone line have shown signs of weakness. Apple derived 15 percent of its revenue from services in 2018, while more than 60 percent came from its iPhone, according to data compiled by Bloomberg.

Shares of Apple rose as much as 2.2 percent on Tuesday, snapping a two-day skid.

Here’s what analysts are saying about the event:

Canaccord Genuity, T. Michael Walkley

The announcements “support Apple’s ecosystem approach,” and the higher-margin services revenue growth will “continue outpacing total company growth.”

Affirms buy rating and lifts price target to $230 from $185, which is one of the highest targets on the Street.

Morgan Stanley, Katy Huberty

“Big picture, this strategy aligns with our thesis that Services, not devices, hold the key to Apple revenue and profitability growth over the next 5 years.” However, while the breadth of the services that were launched was “impressive,” the lack of pricing detail makes it difficult to evaluate the financial impact.

Keeps estimates unchanged but lifts price target to $220 from $197. Affirms overweight rating.

Citi, Jim Suva

The event represented “a boost to every angle of its services,” but it won’t be “a major catalyst for the shares as consumers are slow to change their behavior.”

Affirms buy rating and $220 price target.

Goldman Sachs, Rod Hall

The event was “materially different” than expected, as it had anticipated the TV service to be available immediately, and for more pricing details to be announced.

“Though all of these services are interesting from a platform churn point of view none seem likely on our calculations to materially impact EPS in the short term.” As a result, “we expect the focus to return to the slowing iPhone business.” Affirms neutral rating and $140 target.

What Bloomberg Intelligence Says

“These services will take two years or more to materially affect Apple’s growth. Still, its foray into original content will allow Apple to tap a high-growth market.”

-- John Butler, Global senior telecom analyst-- Click here to view the research

Piper Jaffray, Michael Olson

“The primary takeaway from today’s event is that Apple is increasingly looking for ways to leverage the massive (~1.4B) base of active installed devices by layering on more services per user/device.”

The new services could help Apple show services revenue upside in fiscal 2019.

The Apple TV app being available on various smart TVs, along with Amazon Fire and Roku, is important to driving higher adoption.

Price target raised to $201 from $187. Affirms overweight rating.

Loup Ventures, Gene Munster

The four services that Apple announced could add more than $20 billion of “high visibility” annual revenue within five years.

“While we are maintaining our estimate of $78B in Services revenue in 2023, the levers to achieving that number are more clear.” Keeps hold rating and $160 price target.

(Updates stock and chart to market open, adds Canaccord comment.)

To contact the reporters on this story: Jeran Wittenstein in San Francisco at jwittenstei1@bloomberg.net;Ryan Vlastelica in New York at rvlastelica1@bloomberg.net

To contact the editors responsible for this story: Catherine Larkin at clarkin4@bloomberg.net, Steven Fromm

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