Apple Inc. Stock Is A Buy For Services (And The iPhone 8, Of Course)

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Apple stock didn’t do much on Friday as investors held off ahead of Tuesday’s earnings report. The shares continue to hover just below their record high, and for once, no one is really counting down the minutes until Apple’s next earnings report because it’s little more than a formality. Investors who buy Apple stock now do so for the iPhone 8 rather than Tuesday’s earnings report. Now one firm is recommending another reason to buy it, or rather, it’s just an indirect version of the same reason.

What to expect when Apple reports earnings

Credit Suisse analyst Kulbinder Garcha has an Outperform rating and $170 price target on Apple stock, and he projects $52.8 billion in sales and earnings of $2.05 per share for the March quarter. He feels that the company could even surprise on iPhone units, despite all the calls for a disappointment. It’s hard to imagine anyone being disappointed with a miss on iPhone units on Tuesday, however, given that the general theme right now is the assumption that people are waiting to buy a new phone until after the iPhone 8 is released.

According to Garcha, supply chain data points indicate that total iPhone shipments are in line to slightly ahead of expectations. He sees the potential for a stronger mix, although another firm warned earlier this week that the average selling price might be a disappointment because of data suggesting people were opting for smaller storage configurations and the less expensive models. Garcha’s checks though indicate a mix shift toward the more expensive iPhone 7 Plus.

Looking forward to services… because of the iPhone 8

Apple management has been emphasizing services revenue over the last couple of quarters, and Garcha highlighted services as well in his April 28 research note. He believes that an “iPhone 8 Super Cycle” featuring three models, one of which will have an OLED display, will boost upgrade rates and convince new customers to buy. He estimates that iPhone units should grow to about 265 million by 2019 from 215 million in 2016. And as more people buy and use iPhones, the more Apple’s services revenue should grow, theoretically.

Because of the high retention rates that are already attached to the iPhone, and what he says is a “superior ecosystem and multi product compute advantage,” he pegs free cash flow at $75 million for the long term. He feels that Apple stock is “trading cheaply on a P/E ex-cash basis” at about 11 times calendar year 2018 earnings per share.

Apple stock can’t live on services alone

Services includes things like iTunes and the App Store, and while Garcha may be banking on services as future support for Apple stock, new research suggests that there could be a problem. The iPhone maker has tried to get into the streaming music business because of services like Spotify which have disrupted iTunes, the disruptive force in the music industry many years ago. However, Apple Music has failed to appeal to the Millennial generation, according to LendEDU.

The firm found that Spotify is the preferred source of music for 47% of Millennials, while only 14% prefer iTunes and/ or Apple Music. LendEDU suggests that what Apple may be missing out on is the social aspect of music, as Spotify enables users to share things with others not only through Spotify itself but also through Facebook, Twitter, Tumblr, WhatsApp, Google Hangouts, email or even text messages. And then there’s the fact that Spotify has been in the game for four years more than Apple Music has. Apple has built its business around stickiness and retaining users, so it should know how difficult it is to unseat a much-loved and used incumbent.

Shares of Apple stock ticked lower by as much as 0.07% to $143.69 during regular trading hours on Friday.

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