"Given the advanced technology and components involved, 5G devices will be high-end. Our analysis (built on pricing data by model) of market share by price level shows Apple's share increases as prices go higher," analyst Kyle McNealy said.
Jefferies estimates that Apple generates services revenue from every active device of $38 in fiscal 2020. "That's up from $25 in 2017 and growing at 14%," the analyst wrote.
"Our iPhone units are ahead of the Street by 9 million for fiscal 2020 with most of these coming from the midrange. If we assume these are mostly new iPhone users, Apple would make $342 million in annual services revenue off of these customers -- or almost a point of services growth."
All told, Jefferies estimates that service revenue will represent 20% of sales and 38% of operating profit in fiscal 2020.
Apple has been rolling out new subscription services options this fall. The company unveiled some of the games in its Apple Arcade subscription service, which costs $4.99 a month, as well as its Apple TV+ subscription service, also $4.99 monthly. Add to that the company's already popular Apple Music subscription service.
"The largest components of services are App Store, licensing and other, Apple Care, and iCloud," the analyst wrote. "The fastest-growing is Apple Music. We think the increasing mix of Apple's more recurring, higher-margin software services business versus the core hardware business will allow investors to apply a higher valuation multiple to the company over time."
Jefferies placed a $260 price target on the shares, indicating 19% upside from their Monday closing price.
Apple shares were 1.1% higher at $221.09 Tuesday.
"Apple shares currently trade at 13.4x our calendar 2020 base business EPS projection, McNealy wrote. "We think it's too cheap for a business that should drive 8%-plus top-line growth and 12%-plus EPS power sustainable over time."
Apple is a key holding in Jim Cramer's Action Alerts PLUS charitable trust.