In anticipation of first quarter earnings reports, analyst are weighing in on two technology giants Apple Inc. (NASDAQ:AAPL) and International Business Machines Corp. (NYSE:IBM). Apple is currently facing speculation regarding utilization of its different platforms, while IBM faces scrutiny on its strategic imperatives. While analysts are projecting bullish outlooks for Apple, ratings are less than positive for IBM, who holds a more bearish analyst consensus.

Apple Inc.

UBS analyst Steven Milunovich has shown concern regarding Apple’s platform utilization, and has shed some light on ways in which the company may be able to achieve additional leverage.

The analyst explains that Apple has two platform types. The firstis its innovation platform, iOS. iOS exhibits software and services which support high margin device sales. The second  is the company’s transaction platform. This platform monetizes services more directly, and includes the App Store, Apple Music, and Apple Pay.

Milunovich emphasizes the importance of the innovation platform, noting, “If Apple doesn’t sell hardware then it doesn’t enjoy services revenue.” He elaborates further noting, “emphasizing Services as the reason to own the stock has the relationship backwards, for the most important role of services is to create the ecosystem that makes devices attractive.” In essence, the iPhone on its own is merely a pipeline product, it is the addition of the App Store that makes the product a platform. This is not the only Apple entity the company has turned into a platform, with iOS and various other services requiring “a more open way of thinking”, and becoming platforms as well.

Milunovich notes that services may result in 20% of the company’s profits in 2020, though it would still be reliant on hardware success.

For years in which the iPhone has shown less success, the analyst mentions that services can provide as much as 30% of revenue growth, as well as an outsized profit contribution. This being said, the analyst emphasizes the relevance of hardware, claiming, “total revenue growth will be low-single digit without hardware growth, and most services are tied to hardware success—no device sale, no services.”

The analyst concludes, commenting that “monetization is questionable” for Apple. According to Bloomberg, the company may begin to charge developers for App Store search placement, which Milunovich claims would be detrimental seeing as services should support device sales.

Milunovich reiterates a Buy rating for Apple, with a $120 price target.

According to TipRanks, Milunovich has a 41% success rate with an average return of 0.5%. AAPL currently holds a Strong Buy consensus, with 92% of analysts bearish, and 8% neutral. The average price target for the stock is $136.56 with a 25.79% upside.

International Business Machines Corp.

IBM is currently working to re-balance and reorganize its business portfolios, narrowing focus towards fast-growing strategic imperatives including digital technology platforms.

In light of this, Cantor Fitzgerald analyst Joseph Foresi weighs in on the performance of strategic imperatives, the stability of the remaining core business, and influence driven by macro-economic data.

The analyst confirms that strategic imperatives and core business stability are key to company success and a positive 1Q, which the company is expected to report April 18.

In analyzing IBM, investors focused on strategic imperatives performance, the stability of remaining business, bookings, and backlog numbers. The analyst notes, “We are looking for color on the timing regarding a return to aggregate growth, spurred by revenues generated from Strategic Imperatives and signs of stabilization in the businesses outside Strategic Imperatives.” He explains that Strategic imperatives revenues consist of 35% of total revenues, which portrays a 16% growth in constant currency, and a 10% overall growth from the previous quarter. Total IBM shares have increased 16% from 11% S&P500 since the company’s last report.

Foresi expects revenue to decline, but at a slow pace. The analyst’s EPS estimate is $2.04, falling below consensus of $2.09. However, he notes his first quarter revenue estimate to be $18.5 billion, which is slightly higher than consensus of $18.3 billion.

Additionally, Foresi expects services to further contribute towards revenues, while strategic imperatives and security are expected to become key drivers for company growth and expansion. Foresi explains “a stabilization of the core business and subsequent return to growth [are] necessary for multiple expansion.”

Risks for IBM essentially lay on the basis of growth expectations, and international business. Namely, concern regarding emerging technologies being unable to meet anticipated growth rates, international risk, considerations regarding cybersecurity and privacy, and intellectual property infringement.

The analyst concludes, commenting that he expects management to spend time discussing the “composition and outlook for new segmentation.” He explains, “Currency continues to be an issue, but we believe the headwinds are subsiding somewhat.”

Due to this reasoning, the analyst reiterates a Hold rating for IBM, with a price target of $122.

Foresi is ranked #483 out of 3,880 analysts on TipRanks, with a 94% success rate and an average return of 9.9%. The current analyst consensus for IBM is Hold, with 20% of analysts bullish, 60% of analysts neutral, and 20% bearish.joseph foresi stats