Shares of Apple (AAPL) shot up more than 3% on Monday after Goldman Sachs (GS) initiated coverage of the tech giant with a Buy rating and price target of $199 for the company’s stock.
In an investor note, Goldman analyst Michael Ng laid out his investing thesis, writing that the firm’s high level of brand loyalty among consumers will help it increase average revenue per user (ARPU) over the coming years, while services growth should offset a slowdown in hardware sales in the near term.
“Apple’s installed base growth, secular growth in services, and new product innovation should more than offset cyclical headwinds to product revenue, such as a reduced iPhone unit demand due to a lengthening replacement cycle and reduced consumer demand for the PC & tablet category,” Ng wrote.
According to Goldman, Apple’s services business should account for 40% of the company’s gross profit by 2027, up from 33% in 2022, thanks to iCloud+ sales, improved advertising revenue, and a boost in Apple TV+, Apple Arcade, and Apple Fitness+ subscriptions.
Apple has been leaning into its services segment for years, expanding from offerings like iCloud storage to Apple TV+ and Apple Music+. The idea is to better monetize each new iPhone, iPad, and Mac user, developing a recurring revenue model that can help Apple wean itself off of its reliance on the iPhone as its top sales driver.
In 2022, the iPhone accounted for $205.4 billion of Apple’s $394.3 billion in annual revenue. Services, meanwhile, made up $78.1 billion of the company’s sales. That’s more than its wearables division, which brought in $31.2 billion; its Mac division, which made $40.1 billion; and its iPad division, which saw $29.2 billion in sales.
And while smartphone sales growth in mature markets like the U.S., Europe, and China might be slowing, Ng says there’s still opportunities for Apple to grow its iPhone installed base in other regions, including India.
That doesn’t mean there’s no opportunity for growth in the U.S. and China, though. Ng says that switchers, consumers who jump from Android to iPhone, can push Apple’s market share higher still in mature markets.
“IPhone has a 54% market share by units in the United States in 2022, up from 44% in pre-pandemic 2019,” Ng wrote. “In China, another key Apple market, iPhone’s unit market share was 16% in 2022, nearly double from 2019. We’re encouraged by the momentum in the United States and China, as well as other key markets.”
Apple has been buffeted by macroeconomic headwinds in the past few quarters from declining consumer spending on smartphones, laptops, and tablets versus during the pandemic era to a challenging digital advertising market and COVID lockdowns in China. But the company’s stock price has largely held up well against those challenges, especially compared to contemporaries in the Big Tech space.
Shares of Apple are off just 5% compared to those of Meta (META), which are down more than 6% and Microsoft (MSFT), which are down 10% over the last 12 months. Shares of Google (GOOG, GOOGL) have declined 27% in the same time, while Amazon is down 34%.
Still, Apple’s Q1 revenue declined 5% year-over-year to $117.2 billion due to worker protests in China over COVID lockdowns. The company should have a better showing in Q2, however, thanks to China ending its lockdowns.
Got a tip? Email Daniel Howley at dhowley@yahoofinance.com. Follow him on Twitter at @DanielHowley.
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