Just when we thought the bull thesis on Apple (AAPL) - Get Report couldn't get any more optimistic, one bullish analyst raised his price target on the stock significantly, citing positive developments in both hardware and services.
But the 'X' factor remains the trade situation with China, which the direction of the U.S. market of late wouldn't suggest is in a horrible place.
Wedbush Securities analyst Dan Ives raised his price target on the stock to $325 a share from $300, with the new price target representing 23% upside for the stock. And the stock has already risen 68% year-to-date. That may seem like an outsized gain, and it is, but Apple's higher margin services business is expected to see revenue growth of 20% or more per year for years to come. That has lifted the stock's forward earnings multiple to around 20, still under the target multiple of the most bullish analysts out there.
But it's not just higher services revenue estimates that have Ives more optimistic. He sees a robust iPhone revenue picture for the next year or so.
"Heading into 2020 and beyond we are incrementally more positive on Cupertino given our recent positive Asia checks, 5G technology/upgrades around the corner, and our belief that China is poised to see renewed growth with share gains on the heels of a game changer iPhone 11 product cycle which the skeptics continue to underestimate," Ives wrote in a note out Friday. Huawei has stolen market share in smartphones in Asia of late, but Ives sees Apple regaining some of that. After several years of declining sales, analysts polled by FactSet now see iPhone sales growing 1% year-over-year in 2021, a growth rate which clearly now has upside.
The iPhone 11's are selling well. That's well documented. But, "Our TMT team continues to pick up that overall iPhone 11 demand is trending 'much better' than expected as we head into holiday season over the next month, which further confirms our iPhone units forecast of 190 million for 2020 is very hittable and could show further upside," Ives said. He added that sales are looking strong in both the U.S. and China.
Ives also said he sees, in his Asia checks, a robust growth in 5G iPhone production for 2020, potentially indicating demand for the hotly anticipated phone is strong.
As for services, Apple TV Plus has launched at the low price of $4.99 a month, as Apple doesn't yet have loads of content (let's not forget Apple has others services too). Some say more content will come and skeptics say that Netflix (NFLX) - Get Report is king of content and can enjoy continued subscriber growth while maintaining $12 - $13 per month pricing.
But "Apple has a compelling list of new shows out/on the horizon as we believe it has committed ~ $6 billion annually to the original shows and movies to beef up its streaming content ambitions going forward." That may be enough annually to support strong original content generation, but others say the $6 billion in content spend only indicates services are a "hobby" for Apple. However, if Apple can acquire more content, not only can it steal subscribers from competitors, it can raises prices. Ives thinks Apple can reach 100 million subscribers and $10 billion in annual revenue within four years stemming from Apple TV Plus.
The 'X' Factor
The trade war likely puts minimal pressure on Apple's services business, which is expected to account for over half of Apple's earnings in the long-term. But it threatens hardware.
December tariffs, should Trump enact them, would raise Apple's cost of importing items into the U.S. from China. Apple can absorb the added cost, which would hurt gross margins, or it can raise prices to protect its gross margin, but hurt demand for the phones. Some analysts say raising prices on 10% to 25% tariffs would shave 1% to 4% off of Apple's expected 2020 earnings per share, while absorbing costs would hurt much more (north of 10%).
Moreover, while stocks are higher in the past month-and-a-half on trade resolution optimism, the White House has said explicitly that no deal has been reached. December is around the corner and tariffs are still on the table.