Morgan Stanley bullish on Apple services, ups AAPL price target to $214

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in AAPL Investors
Apple's Services business is vastly undervalued by the market, and not considered part of the larger whole by investors according to investment bank Morgan Stanley.

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Recognizing an 8-percent growth in annual growth over the last five years, largely driven by iPhone sales, an investor note received by AppleInsider note suggests this will not be sustainable. Anticipated extensions to device replacement cycles, as well as a slowdown in growth of the iPhone user base, could lead to the Services business becoming the main growth center for the company.

"We already see the early stages of this transition," writes Morgan Stanley analyst Katy Huberty, with normalized Services revenue growth accelerating from 18 percent year-on-year to 31 percent in the last five years. Over the same period, Huberty believes the iPhone unit growth averaged year-on-year increases of just one percent.

The growth is enough to prompt Morgan Stanley to adjust its stance on Apple's shares. Rated as "Overweight" but "Attractive" to investors, the investment bank has raised the stock target price for Apple from $200 to $214 per share.

"We acknowledge that iPhone data points remain relevant to the Apple thesis, but we believe investors instead ought to focus on understanding the drivers and growth trajectory of the Services business," states the analyst. The App Store is believed to be the "largest and most significant contributor to Services growth," with a claimed correlation between App Store performance and Services revenue.

Apple's inclination to avoid providing data points about the Services arm's activities is also identified as another sign of the App Store's importance, as the amount of detailed third-party data available for analysis is claimed to provide a "better understanding of the underlying trends" in the store. This third-party data, and the linked performance, apparently makes the App Store's fortunes a suitable barometer for Services analysis.

It is estimated users have spent over $40 billion in the App Store in the last 12 months, and by the 30-percent cut Apple takes from transactions, equates to more than $12 billion in net revenue, up 29 percent year-on-year. Games and related apps are believed to represent only 30 percent of downloads, yet make up close to 75 percent of revenue.

China, the United States, and Japan are said to make up 77 percent of App Store revenue, accounting for between 80 and 90 percent of App Store revenue growth over the last three years. While the three countries are important for future growth, all other regions are expected to grow by 40 percent year-on-year, helping the App Store revenue grow by 26 percent annually through to 2021.




While Morgan Stanley hears from investors suggestions that faster-growing and lower-margin Services businesses like Apple Music, iCloud, and Apple Pay will "drive negative mix shift" away from higher-margin and more established businesses like the App Store, the bank disagrees, as the App Store has a larger revenue base to grow from, and will continue contributing the highest proportion of incremental growth for the next few years.

It is speculated the App Store will provide 45 percent of Services operating profit growth over the next five years.

Investors are also warned to recognize "the fundamental shift in structure" for the company, due to the more accessible and considerably larger cash balance and a far larger Services business when compared to five years ago.

"By FY22, we believe Services will account for 27 percent of Apple revenue and just under 40 percent of gross profit dollars," predicts Huberty.

The opinion of Morgan Stanley follows similar declarations from Loup Ventures analyst Gene Munster, that Apple was entering a "new paradigm" where it needs to be looked at more as a service provider. Munster suggested Investors should shy away from the annual product cycle hype and "disappointment," and instead look at the Services business as a predictable growth engine for the coming years.

Comments

  • Reply 1 of 8
    nunzynunzy Posts: 332member
    These analysts know nothing. They pull these predictions out from where the sun don't shine.

    All they are doing is manipulating the market. Apple is one of the easiest stocks to do it to because they are so profitable.
    psliceracerhomie3
  • Reply 2 of 8
    clarker99clarker99 Posts: 70member
    So, they just ignored ‘Services’ growth till today? It has been growing every quarter for years and has been accelerating since 2015. These firms/analysts are clueless.  

    Not sure where the data for the chart came from but I trust Above Avalon’s numbers and the chart posted in this article shows constant growth:
     https://www.aboveavalon.com/notes/2018/5/15/the-apple-services-machine
  • Reply 3 of 8
    sflocalsflocal Posts: 4,097member
    nunzy said:
    These analysts know nothing. They pull these predictions out from where the sun don't shine.

    All they are doing is manipulating the market. Apple is one of the easiest stocks to do it to because they are so profitable.
    Actually, it's so easy to manipulate because of the extreme secrecy the company operates in.  Wall Street has zero clue what they're doing, that they have to guess (or manipulate).  Since Apple never confirms or denies anything, Wall Street (and the media) can pretty much take any rumor and run with it.

    Apple is its own worst enemy.  I think it's necessary to remain so secretive, lest the Samsungs of the world will get wind and try to beat them to the market.

    nunzy
  • Reply 4 of 8
    rogifan_newrogifan_new Posts: 2,842member
    Morgan Stanley: bullish that people will continue to spend tons of $$ on IAP.
    chasm
  • Reply 5 of 8
    minisu1980minisu1980 Posts: 109member
    Oh so they can read Apple's quarterly financial statements and make obvious commentary (slow clap). I find it funny that, with Apple specifically and the entire stock market more generally, people have not figured out that everyone is just guessing as the future cannot be predicted. 99% of all successful investing is done under the assumption that the overall market will eventually go up over a long enough time period of time and then dollar cost averaging is used to try to offset timing risk. A personal goal of mine is to run an investment firm that literally flings poop at a wall full of stocks and see what sticks, the process by which our investments will be chosen.
    edited May 24
  • Reply 6 of 8
    racerhomie3racerhomie3 Posts: 530member
    Morgan Stanley: bullish that people will continue to spend tons of $$ on IAP.
    People can spend their money however the hell they want to. Who are you to whine about it? Stop acting like you know better.
    brucemc
  • Reply 7 of 8
    chasmchasm Posts: 585member
    To be fair, Huberty is covering herself from having wildly mis-guessed sales of the iPhone X in particular and iPhones generally. She’s still saying (essentially) that peak iPhone has been achieved (it hasn’t), but that investors shouldn’t worry about Apple going forward because it is far more than a one-trick pony (that’s true). Munster, who did not fall for iPhone X panic and scored well with his predictions, is essentially telling his investors the same thing: “don’t worry if iPhone sales soften at some point, Apple has a plan for that.”

    What they don’t understand yet is that Apple will also, over time, increase the revenue of its other services both through growth and increases in value (that may or may not come with increases in price). Bottom line: Apple is a company with ecosystem lock-in, strong value for money spent, an array of highly-appreciated products (even if not every single one is an economy-changing hit), and plenty more growth potential for its services both from increasing popularity and from expansion.

    That’s a trajectory any company on the planet would be envious of.
  • Reply 8 of 8
    minisu1980minisu1980 Posts: 109member
    Morgan Stanley: bullish that people will continue to spend tons of $$ on IAP.
    People can spend their money however the hell they want to. Who are you to whine about it? Stop acting like you know better.
    Ah the targeted market revealed, investors too lazy to think for themselves. Yes, people are free to spend their money anyway they want ... could I interest you in any Herbalife?
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