Apple stock has been on an impressive run this year, as it’s already up by about 20% year to date, and it’s only the middle of March. Meanwhile analysts keep pushing their price targets for the shares higher and higher, beating the drum of an impressive iPhone 8 and droning on and on about how amazing it will be.
Now we have another price target increase for Apple stock, although at least this time it’s a different story. But as analysts keep raising their price targets, others are advising investors to hold out for a pullback.
Apple stock riding on… services?
In a research note dated March 14, RBC Capital Markets analyst Amit Daryanani said he has boosted his price target for Apple stock from $140 to $155 per share. He also reiterated his Outperform rating on the name, as he sees the iPhone 8, capital allocation and cash repatriation, and services revenues driving Apple stock in the near term.
The company’s services segment is starting to get more and more attention, especially since management highlighted it on the last earnings call. Apple aims to double services revenues over the next four years, bringing it to between $48 billion and $59 billion annually. Most analysts agree that it’s quite doable, especially if the company’s installed base grows as they expect it to.
Daryanani noted that growth in the installed base and product replacement cycles are still the two main drivers of Apple stock. However, he adds that the company’s services model adds an annual gross margin tailwind of 40 to 60 basis points. He also expects average revenue per user to accelerate as the company improves its monetization of iOS, and he believes the services model will “create a better valuation narrative” for Apple stock, partially because it could reduce the cyclical nature of the company’s business.
What Apple will need to do to double its services revenue
The analyst noted that Apple management predicts that the Services segment alone will reach the size of a Fortune 100 company by this year, bringing in about $28 billion in revenues. This milestone and the expectation for a doubling of Services revenues by 2020 imply an 18% compound annual growth rate for the segment, versus the 21% average over the last five years.
With an 8% increase in the company’s installed base, the average revenue per user would have to grow 10%, or Apple would have to “do sizable M&A” to reach its targets. Daryanani feels that organic growth rather than acquisitions would drive a multiple expansion in Apple stock.
So does this mean buy Apple stock now?
A pair of InvestorPlace contributors suggest that investors should wait before building bigger positions in Apple stock. Brent Kenwell notes that the name has several positives, like its huge cash stockpile of more than $40 per share, its massive cash flow, and the below-market valuation on its stock.
However, he feels that a pullback is imminent and thus would present an opportunity to build a position. He explained that while the stock’s P/E ratio is good, it’s still near the top of its five-year range. So while it’s “cheap compared to the average stock,” it’s also “expensive compared to its historical average.” Apple stock is also notoriously volatile and has been rallying most of the year, so he plans to wait for a correction in the ballpark of 7% to 10%.
James Brumley agrees that a slowdown in the shares could be just around the company, as he thinks they’re getting more difficult to own. For one thing, he thinks the iPhone 8 might end up costing too much, with consumers being unwilling or unable to shell out more than $1,000 for a smartphone.
And then there’s the continual promise of something bigger and better, with consumers always waiting for the next big thing in the iPhone. Analysts are forever promising something better, so some might keep waiting. And then there’s the Google Pixel line, which he feels could put up a strong challenge for the iPhone.
Options suggestions for Apple stock
Investors who are bullish on Apple stock but holding back by arguments such as those offered by the InvestorPlace writers might instead consider some options trades. Todd Gordon of TradingAnalysis.com told CNBC that he’s buying the April 7 weekly 140 strike calls and selling the April 7 weekly 142 strike calls for $73 per options spread. So if Apple stock closes higher than $142 on April 7, he’s rewarded with $127, but if it remains lower than $140, he loses his investment. To prevent this, he suggests exiting the option if the value of the spread falls to about half of its value.
He’s bullish on the stock because of the price action on March 9, which involved a “huge” intraday selloff before clearing out “any selling stops” before rallying up to closing bell. He said this suggests “underlying strength.”
Shares of Apple stock edged higher by as much as 0.33% to $139.45 during regular trading hours on Wednesday.
