Apple (AAPL) - Get Report shares have done in 2020 what most market participants would not have expected when COVID-19 struck the U.S.: reach an all-time-high months after falling into a bear market. And a Morgan Stanley price target bump Wednesday is predicated on evidence that the stay-at-home environment is lifting Apple’s already promising services business.
While the S&P 500 has fallen 4% year-to-date, Apple has gained 8% and sits at its all-time-high of $324 a share, for a market cap of $1.4 trillion.
Apple had fallen 30% from that peak in March when the broader market was doing the same and then some and when Apple’s supply chain was essentially shut down. Apple has seen a minimal amount of revenue and earnings shaved off of its hardware projections for the year, projections that show a rebound in 2021. Nobody had much question about its services business, which is growing in the mid-teens annually in percentage terms. The higher margin services business is expected to account for over half of total revenue in future years.
But now, the stock is getting some love from one of its most bullish -- and often correct -- analysts. Morgan Stanley’s Katy Huberty raised her price target to $340 a share from $326 in a note out Wednesday.
“Over the last 4 months the COVID-19 related shelter-in-place /quarantine measures have been a tailwind to the app economy, as consumers have been forced to spend more time than usual inside their home, driving an acceleration in app store download and net revenue growth,” Huberty wrote. “High levels of engagement have sustained as the “new normal” (at least in the near-to-medium term)… includes more time spent indoors, which should remain a tailwind to app store performance, and which is now incorporated in our raised services estimates.”
Huberty said the current quarter so far has seen a 35% increase in app store revenue, above her June month estimate of 18%. She “conservatively” raised her total services revenue estimate to 17% year-over-year growth from 12%, or a new total of $13.4 billion from $12.9 billion.
But on the back of this new normal, she raised her services revenue estimate for 2021 significantly, a year on which she applies her valuation multiple on the stock. Her 2021 services revenue forecast was raised to $63.7 billion, which represents 17.8% growth, an acceleration over a 2020 campaign she thinks can post 16.9% growth. Her earnings per share estimate for 2021 moved to $15.31 from $14.90.
But her price target moved up more than the 2.75% that would be suggested by her EPS bump. She now applies a 22.2 times multiple on 2021 EPS, up from a previous multiple of 21.8, to account for “an expansion in peer multiples.”
Apple seems to now be joining fellow big tech players like Amazon (AMZN) - Get Report, Microsoft (MSFT) - Get Report and Netflix (NFLX) - Get Report as a company enjoying the phenomenon of the accelerated secular growth trend in tech spurred by the lockdowns.