Apple (AAPL) PT Raised to $148 at Macquarie; Services Segment Remains 'Underappreciated and Misunderstood'

January 20, 2017 11:43 AM EST
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Price: $230.54 +1.31%

Rating Summary:
    44 Buy, 24 Hold, 5 Sell

Rating Trend: Up Up

Today's Overall Ratings:
    Up: 5 | Down: 10 | New: 10
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Macquarie analyst Ben Schachter raised his price target on Outperform-rated Apple (NASDAQ: AAPL) to $148.00 (from $133.00) after a deep dive into Apple Services margins to show how Apps and Other Services revenue can drive significant gross margin expansion.

Schachter said services remain a much underappreciated and misunderstood segment. He highlighted the following key points:

1) Consensus underestimating overall GM by 300-400bps (by FY’21)

2) GM dollars driven by Services & App Store growth – 75% of total AAPL gross profit growth through ‘21 comes from Services. App Store key driver.

3) Detailed Analysis of Services GM – Our segmented margin analysis estimates Apps at 90% GM, Apple Care at 70% GM, and all other Services (iTunes, licensing, iCloud, Apple Pay, etc...) at 65%. (Detailed model available).

4) Apps Diversification Key – For our thesis to play out, Apps must diversify beyond games. Subscription take-rate change is helping this begin.

5) Our Model Assumes Very Limited Hardware Growth – Post iPhone 8 cycle, almost 100% of total AAPL rev and GM growth driven by Services.

6) Our model does NOT assume meaningful new businesses (video, etc).

7) Increasing our GM drives EPS estimates revision – Our new GM increases FY’17E EPS $0.41 from $8.69 to $9.10 and FY’21E $2.05 from $12.46 to $14.52.

"Finally we note that in our view, the App Store is one of the best business models ever created," he commented. "Apple investors need not rely on Apple for all the innovation to drive the model forward. If someone creates a game in their parents’ garage in Taipei or if GE revolutionizes health care with an app, Apple can benefit."

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 $119.78 yesterday.

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