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Will New Streaming Service Propel Apple (AAPL) Stock to New Heights?

support@smarteranalyst.com (Ben Mahaney)

Are we witnessing an Apple (AAPL) comeback?

Since bottoming out at the beginning of the year — down nearly 40% since its October high — Apple stock is up to a four-month high. Though the company is still embroiled in a legal battle with Qualcomm and China still remain a question mark, shares are up more than 20% year-to-date, as excitement grows over new products and services. Just this week Apple announced an upgraded version of its AirPods, as well as upgrades to its iMac line and iPad Mini. Next week, the company is expected to be an even bigger week for the company, with expectations of announcements on subscriptions and services.

Wedbush analyst Daniel Ives remains bullish on AAPL, maintaining his Outperform rating, while increasing his price target to $215 (from $200), suggesting the stock has 13% upside potential over the next 12 months. (To watch Ives' track record, click here)

On Monday, Apple is expected to announce a new streaming service. Ives believes this new service will “compete with the likes of Netflix, Disney, Hulu, among others,” and is “a pivotal step for Cupertino in further driving its services flywheel and entering the ‘streaming content arms race’ which is clearly starting to take form.” But Ives says the announcement “is just the tip of the iceberg for Cook's broader streaming content strategy to take hold and...adds a significant potential catalyst to the Apple services growth story for years to come.”

Ives calls Apple’s growing services business a “wild card in driving the valuation higher for Apple.” The analyst estimates a $400 million valuation for the services segment, with revenue expected to pass $50 billion by FY20. The new streaming service is expected to be a major boost to the segment, as Ives says Apple “is spending roughly $1 billion on original content this year,” including working with Oprah and Steven Spielberg.

Though Ives is bullish on the new service, he realizes the company is “definitely playing from behind the eight ball in this content arms race with Netflix, Amazon, Disney, Hulu, and AT&T/Time Warner...investing significantly more dollars ($20 billion combined and counting per annum) on content.” But given Apple’s massive cash holdings, Ives says Apple should look into “larger, strategic M&A (a24, Lionsgate, Sony Pictures, CBS/Viacom, Netflix, MGM) around content over the coming year…” in order to even the playing field more quickly.

Assuming all goes well for the new service, Ives believes “reaching 100 million subs in the medium term (3 to 5 years) is a realistic goal that could translate into a $7 billion to $10 billion annual revenue stream over time for Apple and further cement its installed base and halo effect.” With this, the analyst increases his price target by $15.

While Apple was once a sure-fire stock, the tide has turned for the tech giant. But with shares up more than 30% since its January low, things are looking better for the company. TipRanks analysis of 37 analysts shows a consensus Moderate Buy rating, with 20 analysts recommending Buy and 17 on the sides. However, the 12-month average price target of $183.26 reflects a 6% downside from its current price. (See AAPL’s price targets and analyst ratings on TipRanks)

 

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