Apple rises as JPMorgan says buy on compelling services transformation

This morning, JPMorgan analyst Samik Chatterjee started coverage of Apple (AAPL) with a buy-equivalent rating, citing his view of the company's "compelling" services transformation, ripe installed base, and core capital deployment.
BUY APPLE: In a research note to investors, JPMorgan's Chatterjee initiated coverage of Apple with an Overweight rating and $272 price target, implying a 23%-plus upside from current levels. The analyst noted that while Apple's leadership position in the premium smartphone market is well understood by investors, he still sees considerable upside to the stock from current levels led by a combination of faster than expected transformation to a services business, stronger than expected price increases in the core iPhone business, an underappreciated position for continued robust growth in the installed base, continuous innovation disrupting new end-markets, a boost to earnings growth from a normal course of share repurchases, and optionality available from the use of a strong balance sheet for either outsized share repurchases or M&A. Chatterjee believes M&A opportunities will prioritize large installed bases, as Apple's interest in entering new end-markets is likely to be evaluated based on the opportunity to offer services on a large installed base like gaming services, automotive services, and smart speakers. Overall, the analyst argued that Apple is transforming from a hardware company to a services company faster than investors had expected, which is driving financial and valuation upside. In addition to the increase in service revenue opportunity per device, growth in the installed base of Apple devices is the other primary contributor to the growth in new services revenue, he contended. While investors have been concerned about the "modest growth in iPhone volumes," Chatterjee noted that Apple has still been able to drive double-digit increases in the installed base through a combination of new subscribers, incremental consumer switching to iOS, and replacement units from existing iOS users making it to the secondary market. The analyst estimates a total installed base of 1.4B devices in 2017 rising to 1.9B by 2021 or a 7%-plus CAGR. Moreover, Chatterjee foresees pricing power, driven in part by differentiation on technology, continuing to surprise investors on the upside. PRICE ACTION: In morning trading, shares of Apple have gained over 2% to $225.10.

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