Shares of legendary tech firm Apple (AAPL) have been innovating like it’s nobody’s business these days. Whether we’re talking about the futuristic products under development like the Apple Car or mixed-reality (AR/VR) headset, or efforts to beef up its services business, it’s clear that Apple stock has a lot going for it these days.
Apple’s electric (potentially autonomous) car and virtual- or mixed-reality goggles are potential game-changers and AAPL stock needle-movers. Still, such projects are clouded in a haze of secrecy and uncertainty.
Sure, you can go by the rumors or reports by accurate analysts on Wall Street, but the timeline and accuracy are a question mark when conducting a valuation.
Apple’s Services Push Could Bring Forth Even More Multiple Expansion
There’s been a lot of praise for Apple’s services push over the years. The stock has been rewarded with a great deal of multiple expansion as a result. With Apple TV+, Apple News, Apple Music, iCloud+, Apple Fitness, and a wide range of other intriguing service products, the company has improved its value proposition for its users while improving the firm’s “quality” of earnings.
Indeed, hardware companies deserve a discount, but after such a phenomenal services push, a strong case could be made that Apple is no longer worthy of such a historical discount. It’s not just an iPhone maker anymore; it’s all about bringing out the best hardware, software, and services in one special package.
Following the inclusion of Apple Fitness+ to its services arsenal, not a whole lot has happened. Could it be that Apple has hit the ceiling in its services push?
Following big news that the company is getting into hardware subscriptions, it’s arguable that Apple’s most defining service has yet to launch. Apart from a potential Hardware-as-a-Service (HaaS) offering, Apple has a lot of other disruptive and innovative services that could challenge peers across different market verticals.
The cutting-edge Apple Card, the new business-focused device-management service “Apple Business Essentials,” and the introduction of the point-of-sale feature “Apple Tap to Pay” are all initiatives that could take Apple’s service revenue stream to the next level.
On Wednesday, more light was also shed on the company’s push into financial services, bringing pressure to fintech stocks like Block (SQ), which got pummelled by nearly 5% on the day.
Hardware Subscription and In-Housing of Payment Tech Could Boost Apple’s Margins
With a hardware subscription service and the plan to in-house payment-processing tech, Apple could cut out the middlemen in payments. Doing such would give Apple’s operating margins a nice bump.
Such a margin boost, plus the “ironing out” of the bumpy multi-year iPhone cycles with its hardware subscription service, could also pave the way for a considerable amount of appreciation for Apple stock.
Indeed, hardware subscription services are perplexingly new to many. However, if there’s a company to bring forth a new way of doing things, it’s Apple. Given such margin- and valuation-multiple-driving service initiatives, a strong case could be made that shares of AAPL ought to be trading at well over 30 times earnings.
At writing, Apple stock goes for $176 and change per share, putting the trailing price-to-earnings (P/E) multiple at 29.4.
Following the exciting news concerning Apple’s HaaS and financial tech service push, I think Apple stock is still way too cheap to ignore, and that’s not even considering the potential behind next-generation products that could steadily flow out of the pipeline over the next five years.
For these reasons, I remain as bullish as ever on shares of Apple, even as they approach new highs.
Wall Street’s Take
Turning to Wall Street, AAPL stock comes in as a Strong Buy. Out of 28 analyst ratings, there are 23 Buy recommendations and five Hold recommendations.
The average Apple price target is $193.36, implying 9.6% upside potential. Analyst price targets range from a low of $161.00 per share to a high of $215.00 per share.
Could Recent News Induce More Analyst Price Target Hikes?
As noted above, the consensus price target implies just 9.6% in upside for the year ahead. Still, I do think recent developments could pave the way for a wave of upgrades within the sell-side analyst community. Despite the below-average implied upside, the stock still sports its Strong Buy rating—good news for the bulls who’ve stuck by the name.
Recent margin-enhancing initiatives could have an even more material impact on shares. Over the coming weeks, we’ll wait and see how recent innovations will be reflected in the financial models of the many analysts covering the name.
The Bottom Line on Apple Stock
It’s so hard not to love shares of Apple, as it kicks its services business into high gear while working on the next game-changing device. The hardware service offering may take some time to get used to. It’s an innovative, intriguing concept. Nonetheless, in due time, I think that any success with the model could be highly accretive to the quality of earnings.
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