FBR Capital Starts Apple (AAPL) at Outperform

After the close, FBR Capital initiated coverage on Apple (NASDAQ: AAPL) with a Outperform rating and a price target of $185.00.

Analyst Daniel H. Ives commented, "While Apple remains a widely covered company from a sell-side perspective, we are throwing our hat in the ring with the unique approach of focusing more on Apple’s software, which represents the "crown jewel" embedded in its products/ services and should ultimately help lead it to becoming the world's first $1 trillion company as mobile device hardware becomes increasingly commoditized.

He continued, "With the Apple Watch launch front and center this week (pre-sales) as it potentially opens up another growth avenue, we ultimately believe that, at its core, Apple attracts its customers by leveraging the benefits of its closed software ecosystem, driving greater adoption of its devices and services, a positive dynamic and a major ingredient in Apple's recipe for success. Our long-term confidence in this technology heavyweight stems from a number of massive growth opportunities over the coming years including: (1) increased focus on its services business, (2) ramping penetration of the Chinese mobile market, and (3) upside from new device categories (e.g., wearables). We believe the Street is currently underestimating the top-line/profit growth potential in these key areas with Apple's all-important software platform at the epicenter of its solutions. Overall, while we estimate 24% and 6% year-over-year revenue growth for FY15 and FY16, respectively, we believe Apple can improve its strong market position and impressive gross margins over the coming years, with new markets and higher-margin revenue streams poised to add more fuel to this growth engine."

Ives cited three key points:

• Software is the secret sauce. We believe the greatest opportunity for profit growth over the coming years, excluding the launch of any new groundbreaking device categories, includes capitalizing on the company's higher-margin (we estimate 90%-plus after content costs) services business. Based on our scenario analysis, we estimate that in the high-growth scenario, services could contribute up to 32% of Apple's total gross profit in FY17, up from our 12% forecast for FY15. The company remains in the early days of growing key services, such as Apps, streaming TV services, and Apple Pay, which we believe will contribute to top-line/profit growth over the coming years as they become an increasingly larger part of Apple's vision.
• Growth opportunities for a technology juggernaut. Despite the company's tight grip on the consumer smartphone market, with the iPhone as the linchpin of the Apple story, importantly, we believe penetration at the enterprise with Apple devices due to strong bring-your-own-device (BYOD) trends remains another key opportunity. In our view, BYOD trends could ultimately drive massive growth/profit potential with more device uptake, as the number of productivity apps increases, and as the company seeks more strategic partnerships (e.g., IBM).
• Valuation. We base our 12-month price target of $185 per share on a combination of a comparative valuation, sum-of-the-parts analysis, and 10-year DCF model.

For an analyst ratings summary and ratings history on Apple click here. For more ratings news on Apple click here.

Shares of Apple closed at $126.78 yesterday.

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