Apple stock's price target is going up.
After a rough start to 2019 that included a guidance cut and multiple analyst downgrades, Apple (ticker: AAPL) stock has bounced back and appears to once again be on the right track. Investors appear optimistic about an end to the trade war with China that the company blamed for its guidance cut. Even with Apple stock up 17 percent already this year, Bank of America analyst Wamsi Mohan recently upgraded AAPL stock to "buy" and raised his price target from $180 to $210. Here are 10 reasons Mohan says investors should be buying Apple stock.
Industry trends are positive.
One of the major concerns for AAPL investors is the health of the company's iPhone inventory given media reports of price cuts in China. IPhone channel inventories grew by about 4 million units in the fiscal first quarter, according to Bank of America estimates. However, Mohan says inventories likely declined by 4 million units in the month of January alone thanks to price cuts, completely eliminating the first quarter build. The price cuts certainly cost Apple some margin in China. But looking ahead, Mohan says lower inventory levels are a net positive for investors and could help drive iPhone order stability.
China price cuts are deceptive.
Any time a company cuts prices on a product, investors immediately get concerned about demand. Mohan says Apple has likely been monitoring a couple of key developments in China that have given the company the opportunity to lower prices. First, the U.S. dollar has weakened in 2019 compared to the Chinese yuan, which is a positive for Apple and provides some wiggle room on pricing. Second, China recently announced an aggressive cut to its value added tax. In the past, Apple has taken the opportunity to lower prices and attempt to gain market share following tax cuts.
There's an Apple Services opportunity in China.
AAPL investors are looking to the company's services segment to pick up the slack as iPhone unit revenue growth flattens. Unfortunately, services revenue growth in China has been a problem for Apple. Mohan says that dynamic may soon change. He says the Chinese government has once again begun approving mobile games after putting gaming approvals on hold throughout most of the second half of 2018. Mohan says newly approved games helped drive 10.7 percent China App Store revenue growth in the first two weeks of February, up from just 4 percent growth in January.
Gross profit trends are positive.
Year-over-year growth in gross profit dollars for Apple has been an excellent leading indicator for Apple stock over the past five years. After peaking at around 20 percent in late summer of 2018, Apple's gross profit dollar growth took a nosedive along with Apple's share price. However, Mohan says gross profit dollar growth is currently in the process of bottoming at around negative 9 percent in the March quarter and is headed back up to around 15 percent within the next year or so. Mohan says investors can expect significant gross profit dollar growth starting in the second half of 2019.
Wall Street is bearish on hardware sales.
The bear case against Apple is that hardware sales will drift lower in coming years. However, Mohan says Apple stock seems to be priced as if lower hardware sales will also drag services revenue growth into negative territory as well. He says that scenario is way too pessimistic. Instead, Bank of America projects hardware revenue growth will be mostly flat in coming quarters, while services revenue will grow in the mid-teens. Based on his growth scenario, Mohan assigns roughly $78 per share in value to Apple stock from the hardware business and $116 in per-share value from the Services business.
Earnings estimate cuts were too deep.
When Apple slashed its guidance to kick off 2019, many Wall Street analysts followed up by cutting their own earnings and revenue estimates for Apple. Mohan says some of these cuts were too deep, especially in the longer term. Bank of America's fiscal 2019 EPS estimate of $11.55 is only slightly above Wall Street consensus. However, Mohan is calling for fiscal 2020 EPS of $13.39 and fiscal 2021 EPS of $16.05, well above consensus estimates of around $13 and $14.50, respectively. Mohan said investors should anticipate meaningful upward earnings estimate revisions for 2020 and 2021.
Apple can still gain market share.
Apple has a dominant market share in the high-end of the smartphone market. Bank of America estimates Apple has 93.7 percent market share of smartphones priced above $900 and 99.9 percent market share of devices priced more than $1,000. However, Apple has less than 34 percent market share for devices priced in the $500 to $599 price range and just 22.8 percent share of devices below $500. Mohan says falling prices of older iPhone models, such as the iPhone 7 and iPhone 8 models, should soon give Apple quality offerings on the lower end of the price scale.
Apple users are extremely loyal.
Bank of America estimates Apple has an iPhone user base of around 900 million people worldwide, and Mohan says Apple has extremely high user satisfaction rates. In addition to being satisfied with their iPhones, Mohan says switching operating systems creates potential difficulties in transferring data, preferences and contacts. He predicts iPhone user churn will remain in the low single digits even as competitors roll out new products this year. In a recent survey of 151,000 global smartphone users, Bank of America found much higher loyalty rates for iPhone users than any other leading smartphone.
Apple has revenue growth catalysts.
Mohan says Apple has multiple incremental revenue growth opportunities coming in the years ahead. In the near term, he says Apple will likely launch both news and video streaming services sometime in 2019. Apple is expected to announce its streaming service at a special event scheduled on March 25. In addition, Mohan says investors should expect Apple to launch new devices (potentially wearables) at some point. Apple users appear to be more willing to try new devices given the high initial adoption rates of recent launches, including the Apple Watch and AirPods.
World demographics bode well for user base growth.
Global demographics trends suggest Apple could expand its massive user base in the coming years. In particular, Mohan says the rise of the middle class in emerging markets such as China, India, Russia and Brazil has resulted in a huge new segment of the global population with disposable income for the first time. Disposable income per capita in China has been steadily rising for decades. In addition, while smartphone penetration in the U.S. is now around 80 percent, penetration in Brazil and Russia remains below 60 percent. In India, smartphone penetration is only around 25 percent of the population.
Why Apple stock is a good buy now.
Here are 10 reasons experts say investors should buy AAPL stock:
-- Industry trends are positive.
-- China price cuts are deceptive.
-- There's an Apple Services opportunity in China.
-- Gross profit trends are positive.
-- Wall Street is bearish on hardware sales.
-- Earnings estimate cuts were too deep.
-- AAPL can still gain market share.
-- Apple users are extremely loyal.
-- Apple has revenue growth catalysts.
-- World demographics bode well for user base growth.