Tech whiz of the Street Gene Munster, managing partner at venture capital firm Loup Ventures and one of the most well-known analysts to cover Apple Inc. (NASDAQ:AAPL) spotlights a new era for the tech giant’s investors: one riding on the success of Services. In this “paradigm shift,” the following four key themes reign: more iPhone business visibility, Services, capital return, and new products.
First, the analyst points out the company’s smartphone empire is responsible for a whopping 62% of its total revenue, even at a growth rate of just 0% to 5%. For a hardware business that more and more seems to liken to a software business, the “stability” is one Munster take in encouraged stride for the company’s multiple. Second, Apple has Services taking up 15% of its revenue, and Munster calls for a growth at roughly 15% over the course of the upcoming few years. Third, Apple’s consistent yearly share buybacks may rise close to $40 to $50 billion each year. If Apple share leap, the buyback itself could drive share 5% more in 2018, 4% up come next year, and 3% higher by 2020.
Innovation is still key for the company to sustain its soaring iPhone retention levels that tower over 90%, writes Munster, but in the new Services paradigm, “new product categories represent optionality to the AAPL investment story.” What Munster sees here is a company whose valuation does not even mirror yet original content, augmented reality, or self-driving prospects- and a solid business vaulting at 5% to 10% each year, giving back most of its profits to shareholders.
Meanwhile, as the company’s market cap gets close to becoming the first ‘trillion dollar baby’ on the Street, the next question is: could shares jump even further? This longtime AAPL analyst anticipates a story in strong standing for appreciation down the line on back of a “longer-term, more sustainable investing paradigm,” predicting: “The recent move higher in shares of AAPL is likely an early reflection of this emerging paradigm shift.”
Keep in mind, the analyst notes: “About every 10 years, there is a new paradigm that drives investor thinking on the Apple story. It started with the growth of the Mac (’80-’85), then post-Jobs and competition from the PC (’85-’97), then the iPod along with its halo effect which increased Mac market share (’01-’06), and most recently, the iPhone (’07-present). We define the next paradigm as Apple as a Service.”
Moving forward, the story is “drifting away from product cycle hype and disappointment,” contends Munster, who anticipates this could take “a couple years” to “slowly go away.” Bottom line, the analyst surmises: “The Apple as a Service paradigm will not need a super cycle for the Apple story to remain favorable with investors.”
TipRanks indicates very cautious optimism hovers above the big AAPL machine. The tech giant has 16 bulls out of 28 analysts polled in the last 3 months rating a Buy, but 12 hedging their bets on the sidelines. With a slight return potential of 2%, the stock’s consensus target price stands at $193.38, indicating apprehension is baked into these analysts’ expectations.