Here’s Why Apple Services Could Matter a Great Deal Down the Line
As most on the Street will emphasize, Guggenheim analyst Rob Cihra keeps his attention peeled to Apple Inc. (NASDAQ:AAPL) iPhones, with the giant quickly approaching its most massive upgrade cycle in three years’ time. Though the analyst projects iPhones will be the most meaningful driver for Apple from now through fiscal 2020, driving well past 70% of growth (a jump from 62% to 66% of revenue mix), he sees to a time ahead when iPhones won’t reign as revenue kings for Apple.
Rather, while “iPhones matter now,” Cihra wagers that “Services matter later,” believing that Apple’s second-leading business will serve up 25% of Apple’s growth with opportunity to evolve into Apple’s predominant growth-driver by fiscal 2020. “More meaningfully, we forecast >60% gross margins setting up Services to account for nearly 40% of Apple’s profit growth over the next 3yrs and increasing to 24% of its profit pool from 20% today,” adds Cihra, who argues that “growing Services matters for AAPL stock.”
In fact, “The only reason we forecast Services growing to just 15% of Apple’s revenue mix by FY20E is we expect iPhone growth to accelerate near-term, driven by pent-up demand + multi-year OLED rollout + meaningfully higher ASPs,” notes Cihra, who nonetheless draws the important distinction: “We are also not suggesting Apple is morphing into a ‘Services company,’ since its unique model of monetizing value-added software/services mainly through high-end hardware sales remains exceptionally profitable, differentiated and defensible.”
First, Cihra makes a point that PC market growth did not die out by extinction of PC use but a case of those who upgraded less often. For this reason, hardware shows promise compared to smartphone replacement cycles that have extended from two to three years.
Second, the analyst when assessing the giant’s high-end demographic, three descriptors come to mind: loyalty, engagement, and big-spenders, with consumers willing to shell out more than $600 on the newest iPhone. These are the very customers Cihra ventures have the best chance to spend a great deal of time browsing those phones while spending considerable chunks of dollars on Apple’s various apps, content, and services.
Third, while it may be “tough” to boost a top line that already shoots past $200 billion, the analyst projects Services can “consistently” lift 2% points to the giant’s yearly revenue growth coupled with 3 to 4% points of yearly profit growth through fiscal 2020.
Fourth, “Recurring high-margin services income typically gets a higher P/E multiple,” highlights Cihra, another reason Services will be meaningful to the giant’s future success.
The last point the analyst makes draws attention to the need for justification of increased cost for Apple follow-on services, unlike rival consumer internet giants of the likes of Alphabet and Facebook, who offer free services but monetized advertising. For this argument, Cihra concludes expecting the giant to “heavily promote its unique strengths” in both augmented reality (AR) as well as ARKit- all while kickstarting spending on exclusive original TV content for streaming subscribers.
Therefore, with Apple’s most meaningful upgrade cycle since 2014 lying at the foreground, Services, the analyst reiterates a Buy rating on shares of AAPL with a $190 price target, which represents a close to 23% increase from current levels. (To watch Cihra’s track record, click here)
TipRanks analytics exhibit AAPL as a Strong Buy. Out of 34 analysts polled by TipRanks in the last 3 months, 26 are bullish on Apple stock while 8 remain sidelined. With a return potential of nearly 10%, the stock’s consensus target price stands at $170.43.
Blackberry Management Presentation Leaves Canaccord Optimistic
BlackBerry Ltd (NASDAQ:BBRY) shares have been stumbling ever since Monday, when Goldman Sachs resumed coverage in a bearish note sounding the alarm on the smartphone giant.
While top analyst Michael Walkley at Canaccord may remain rooted in his cautious standpoint, he finds that after hosting a presentation and investor meetings with Blackberry CFO Steve Capelli at his annual Growth Conference, the BBRY team is “upbeat” with exciting opportunities ahead to invest for growth.
For now, though the giant showcases a “strong balance sheet for potential acquisitions,” the analyst maintains a Hold rating on the stock with a price target of $10, which implies a just under 15% increase from where the shares last closed.
Walkley comments, “Steve highlighted how BlackBerry has completed its transformation into an enterprise software and services company and how the company is positioned to invest to drive future growth through EMM, QNX, and Radar. We believe BlackBerry is increasingly focused on growing their sales channels for Radar while continuing to invest in developing additional IoT focused solutions. In addition, we believe BlackBerry is well positioned to benefit from growing licensing revenue globally. We believe long-term drivers include growth in licensing revenue from handset JVs globally, continued steady growth in UEM non-regulated markets and for QNX with the BTS opportunity.”
While the analyst anticipates software development for higher ARPU models will prove profitable to Blackberry, he does not predict substantial revenue will hit until fiscal 2019 or after. In fact, “Despite these growth opportunities we remain cautious as the company continues to build or buy enterprise sales channels and believe further progress is needed for distributing newly developed products including Radar,” contends Walkley, but appreciates Blackberry’s stabilization of its business and cost structure.
For fiscal 2018, the BBRY team looks for software and professional services revenue growth of 10% to 15% off the base of fiscal 2017’s $687 million. As Blackberry boasts $1.9 billion in net cash, the analyst projects sufficient capital for growth investments, from adding on more people to the workforce to acquisition opportunities.
Michael Walkley has a very good TipRanks score with a 65% success rate and a high ranking of #34 out of 4,628 analysts. Walkley garners 20.3% in his yearly returns. When recommending BBRY, Walkley gains 25.9% in average profits on the stock.
TipRanks analytics indicate BBRY as a Hold. Based on 8 analysts polled by TipRanks in the last 3 months, 1 rates a Buy on BlackBerry stock, 5 maintain a Hold, while 2 issue a Sell. The 12-month average price target stands at $9.43, marking an 8% upside from where the stock is currently trading.