With the iPhone X set to begin shipping on Nov. 3, Apple Inc. (Nasdaq: AAPL) stock owners are eagerly anticipating the first batch of sales numbers from the new family of iPhones.
The 10-year anniversary models, including the iPhone 8 and iPhone 8 Plus, are expected to drive unprecedented demand, but KeyBanc analyst Andy Hargreaves says Apple shareholders shouldn’t be too concerned about iPhone saturation.
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Hargeaves has upgraded Apple stock to “overweight” and says the company has done an excellent job to position itself for life after the iPhone growth cycle. According to Hargreaves, AAPL will not have to rely on hardware sales growth to increase revenue and earnings in the long term.
“While we remain somewhat pessimistic around multicycle iPhone unit growth, Apple’s expanded market segmentation strategy seems likely to drive average gross profit per user above our previous expectations,” he says. “The potential for Apple to exercise greater pricing power, along with further App Store growth, supports the view of the company as a franchise with subscription-like qualities rather than a regular hardware business.”
KeyBanc predicts that iPhone unit growth in future cycles will likely disappoint the market, but Hargreaves says unit sales numbers will start to become less important for AAPL stock as more of the Cupertino, California-based company’s revenue comes from software and services subscriptions.
In addition, as investors realize Apple shares have no problem maintaining their earnings growth even as iPhone sales start to peak, Hargreaves says AAPL stock may begin to trade at a higher earnings multiple than its current price-earnings ratio of about 18. Apple stock trades at a significant discount to the 25.4 P/E ratio of the overall Standard & Poor’s 500 index.
In the near term, KeyBanc is forecasting fiscal 2018 iPhone X sales of 66 million units. Analysts expect the iPhone X will make up just 15 percent of total iPhone sales volume, an estimate Hargreaves says is too conservative. KeyBanc expects a higher mix of iPhone X models will drive a full-year iPhone average sales price of $760 and gross margins of 39.5 percent. Consensus estimates are calling for $725 and 38.6 percent, respectively.
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In addition to the “overweight” rating, KeyBanc has a $187 price target for Apple stock.
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Apple (AAPL) Stock: Why 1 Analyst Thinks It’s Still a Steal originally appeared on usnews.com
