Apple's Betting Big on Services and Investors Aren't Done Buying up the Stock

There's word that big investors are still hungry for more Apple shares.
By Jacob Sonenshine ,

Apple (AAPL) - Get Report shares could be nowhere near finished with their torrid run of late.

That's according to top analyst at Morgan Stanley, Katy Huberty, who wrote in a Tuesday note that institutional investors look to be in the midst of "positioning long" on the stock.

Apple shares are up about 69% year-to-date, but that run has been slightly heavier in the second half of the year. Huberty said that the average portfolio allocation to Apple stock for an institutional investor increased in the third quarter by 31 basis points, representing the third largest quarterly increase in the last 6 years. Now, the average institutional portfolio is roughly 3% comprised of Apple. The third quarter is well over with and Apple shares have surged 32% so far in the second half of 2019.

Investors have recently begun to appreciate Apple's services business, which is expected to account for the majority of the company's earnings in the long run. Services revenue, which includes newly launched Apple TV Plus, Apple news, Apple arcade (gaming), the broader app store and its highly synergistic credit card with Goldman Sachs, is expected to grow 20% per year for the next several years. Plus, services profit margins are far higher than hardware margins.

Meanwhile, the hardware business seems revived and back to growth. Analysts polled by FactSet are expecting iPhone sales growth of 1% in 2021, after the product saw falling market share in an already contracting global smartphone market for the past few years. Now, Apple's iPhone 11 sales are trending quite positively and analysts are beginning to turn more bullish on 5G sales for 2020. Semiconductor analysts also note that companies like Qualcomm (QCOM) - Get Report are starting to become highly optimistic on 5G demand. Total 5G smartphone units globally could hit 200 million in 2020, Qualcomm recently said on its Q4 earnings call. Goldman Sachs chip analysts say 2021 could see 310 million 5G handset shipments.

Here's the point:

While Apple shares have roared of late, this run could be just the beginning.

"We expect institutional ownership at year end will reflect an even greater level of share accumulation post-September quarter disclosures," Huberty said. Investors seem to be closely monitoring the strength of the services business each quarter and may accumulate those shares over time. "Our recent discussions suggest many investors remain on the side-lines, leaving room for the stock to run to our $296 price target." That's upside of 11% for the next year. The most bullish price target on Wall Street, Wedbush Securities' $325, represents 22% upside.

And, if bullish analysts are correct, it makes sense that the stock has room to run. Some Apple bulls have a target forward one-year earnings multiple of 25. The stock currently trades at roughly 20 times forward earnings. Huberty thinks Apple's multiple could expand about "three to four turns" between now and September 2020.

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