Apple Services and Wearables to Push Stock to $450: Needham
Apple’s Services and Wearables segments will fuel the company’s ecosystem and drive growth in revenue per user for years to come, according to Needham analyst Laura Martin. The firm raised its price target for the iPhone maker to $450 from $350 on Wednesday.
Beyond the iPhone: Saturation of the smartphone market has been a concern for Apple investors, but Apple’s successful rollout of new products and services suggests the company is not a one-hit wonder and will remain a leader in innovation. Non-iPhone product sales such as laptops, iPads, Watches, and AirPods, along with recurring revenue from Services businesses such as Apple Music, are becoming a more significant part of the revenue pie. Martin points out that “for the 6 months ended 6/28/20, Services (at $26B) and Ancillary Products (at $39B) together added 80% to AAPL's iPhone revenue stand-alone, and more than doubled AAPL's iPhone revenue in the latest 3 months.”
Airpods: Apple is expected to sell more than 100 million units in 2020, and had a 41% share of the global hearables market in Q419, according to Counterpoint Research.
Watches: Not only does Apple sit on top of the hearables food chain, but it also is the clear leader in the smartwatch category, with a greater market share than the next three brands combined. However, Apple Watch sales fell year-on-year during the first quarter, reports Canalys. The market intelligence firm estimates that shipments fell from 6 million in Q1 2019 to 5.2 million in the same quarter this year. Apple’s market share also fell sharply, from 46.7% last year to 36.3% this year.
Services: Gross margins are the key to upside in the Services segment. Martin points out that Services margins are 2x higher (at 64%) than device margins. The analyst also emphasizes ARPU growth in the segment, with revenue per user growing from $44 in 2018 to $55 in 2020. Core services include Apple Music, App Store, Apple Pay, and Apple TV+. Services revenue hit an all-time high in the second quarter of fiscal year 2020.
Ecosystem power: Martin says the most important valuation upside comes from declining churn because it keeps consumers in the Apple ecosystem for longer, and raises the amount of locked-in revenue from each user.
