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The narrative around Apple (AAPL) often paints the iPhone and its accompanying launch cycle as the stock performance’s main driver - the flagship product leads the way, with all other revenue streams following in its wake. However, Morgan Stanley’s Kathryn Huberty believes it is time to re-examine this narrative.
Huberty points out that over the last 5 years, AAPL stock has gained around 500% - far outpacing the S&P 500’s 105% return – but iPhone revenue has only increased by 40% during that time. Which means that other products must be driving the share gains.
“In 2014, Apple didn't even have a meaningful Wearables business,” the 5-star analyst notes, “But today Apple Watch, AirPods,and other Wearables & Accessories are a $38B business – the size of a Fortune 120 company.”
That’s not the only example. Rewind to 5 years ago, and investors might have wondered whether Apple was capable of further monetizing its Services business, yet that segment’s sales have doubled over the past 4 years, and now it generates almost $70 billion in annual revenue.
Huberty estimates that over the past five years roughly 6% of Apple's total annual revenue has come from products or services that 5 years beforehand did not even exist, highlighting Apple Watch, AirPods, Apple TV (the hardware), Apple Music, Apple TV+ (the streaming service) and Apple Pay as examples.
Ok, this is all interesting stuff, but what does it all mean? The analyst explained.
“Today,” says Huberty, “We know that Apple is working on products to address two significantly large markets – AR/VR and Autonomous Vehicles – and as we get closer to these products becoming a reality, we believe valuation would need to reflect the optionality of these future opportunities.”
Simply put, the rollout of these future products should be taken into account when considering Apple’s valuation and factoring these in, Huberty concludes that Apple stock deserves a price target boost.
The Morgan Stanley sees AAPL reaching $200 (up from $164), a Street-high target and one set to generate returns of 14%. Unsurprisingly, Huberty rates the stock an Overweight (i.e. Buy). (To watch Huberty’s track record, click here)
The rest of the Street’s take on Apple is flashing mixed signals. On the one hand, based on 22 Buys, 5 Holds and 1 Sell, the stock boasts a Strong Buy consensus rating. However, AAPL stock has just clocked a new all-time high, and in contrast to Huberty, most think the shares have run enough for now; going by the $169.28 average target, they are expected to remain rangebound for the foreseeable future. (See Apple stock analysis on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.