Most Apple Inc. (Nasdaq: AAPL) analysts agree that 2018 will be all about the iPhone X for Apple, but some investors are already growing concerned about where the company will turn next to sustain its long-term growth.
According to Bernstein analyst Toni Sacconaghi, Apple could unlock major upside in its stock if it simply opts to transition to a subscription-based sales model.
Sacconaghi says the timing has never been better for Apple to follow in the footsteps of Netflix ( NFLX), Spotify and Microsoft Corp. ( MSFT) and push to transition its electronic personal device market to a subscription model.
"Customers could lease iPhones, iPads, Macs, and services such as iCloud and Apple Music for one 'low' monthly fee, and have their hardware upgraded after a certain number of years," Sacconaghi says, according to CNBC.
The transition would help reassure investors of the stability of Apple's long-term business and could finally help Apple shed the hardware sales label that has weighed on its earnings multiple for years. Without a change, Sacconaghi says iPhone sales run the risk of suffering from the same elongated refresh cycles that have plagued iPad sales in 2017.
If iPhone users start waiting longer to upgrade, Berstein estimates iPhone sales could decline by up to 17 percent.
"By moving to a subscription model, Apple would be able to lock in recurring revenue streams and freeze the length of replacement cycles, likely leading to a material re-rating of its stock's multiple," Sacconaghi says.
But even if Apple doesn't pull the trigger on a subscription model, Sacconaghi says the company is well-positioned heading into 2018.
Apple could potentially benefit more than any other U.S. company from corporate tax reform. Bernstein estimates Apple could get an immediate 18 percent boost to its earnings per share should the current Republican tax plan be implemented. Apple has $252 billion in cash overseas and could save more than $47 billion in taxes on that cash if it chooses to bring it back into the U.S. at a 14.5 percent rate during the proposed repatriation holiday.
In addition, Sacconaghi says consensus 2018 EPS estimates of around $11 are too low, and Apple's actual EPS will come in closer to $12 next year on the strength of the current iPhone cycle.
Bernstein has an "outperform" rating and $195 price target for Apple stock.
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