What will Apple do next?
It’s been another great year for Apple Inc. (Nasdaq: AAPL) investors in 2017. But with Apple up nearly 50 percent on the year and within a stone’s throw of a $1 trillion market cap, investors need a compelling reason to continue to hold the stock heading into 2018. Fortunately, Citi analyst Jim Suva says there are plenty of reasons to expect 2018 to be another great year for Apple investors. Suva has reiterated his “buy” rating and $200 price target for Apple, and here are six reasons he likes the stock in 2018.
The iPhone
By some measures, the iPhone is the most successful product in history, and investors shouldn’t overthink the role the iPhone will continue to play for Apple. Suva expects the iPhone X supercycle to continue into 2018 thanks to initial supply constraints following its November launch. As a result, he says investors can expect a better March quarter than usual. The iPhone X should significantly boost Apple’s iPhone average sales price, and a growing global user base represents even more opportunity for upgrades. In addition, Suva says the new 2018 iPhone lineup will come with Face ID, bezel-less design and possibly more color choices.
Tax reform
Apple may very well be the biggest beneficiary of all from corporate tax reform. Apple has roughly $250 billion in cash overseas, and the company will likely bring some or all of that cash back into the U.S. during the proposed repatriation tax holiday. As a result, Suva says Apple stock could get a boost from an increase in capital returns or even some blockbuster buyout deals as the company puts that cash to good use. Between tax cuts and share buybacks, Suva estimates Apples earnings per share will get a 15 percent boost in 2018.
Services revenue
One of the fortunate side effects of the Apple global iPhone user base is that it gives the company an opportunity to monetize those users via its Services division. Services is already Apple’s second-most profitable segment and currently represents 13 percent of the company’s total revenue. However, it also delivered impressive 23 percent growth in fiscal 2017, a trend that Suva says will carry over into 2018. “Continued momentum in mobile commerce, mobile gaming and mobile entertainment will continue to drive sticky services revenue growth,” he says. The expensive iPhone X could also trigger more Services revenue from damaged iPhone repairs.
Enterprise growth
A recent IDC survey found enterprise organizations have plans to invest heavily in mobile hardware, including smartphones and tablets. The IDC survey found that organizations are planning to devote an average of 49 percent of their annual mobility-related IT budgets to hardware compared to just 38 percent a year ago. Suva says the more enterprise market share Apple can gain for its iOS system, the better it can leverage its enterprise partnerships. “We believe use of AR, facial recognition and other services like the Apple Device Enrollment program will drive continued adoption,” he says.
Applewood
Apple’s pricey products have historically not performed as well in high-growth emerging market economies. “Applewood” is a nickname for Apple’s drive to infiltrate the Indian market by providing products that local consumers can afford. The lower-end Apple iPhone SE is currently priced at just around $300 in India, and unit sales of the device jumped 80 percent year-over-year in the third quarter. The Applewood initiative is in its infant stages, but Suva says the early positive results coupled with Apple’s miniscule 2 percent penetration rate in India should be exciting for long-term Apple investors.
The valuation
Finally, perhaps the best reason for Apple investors to be optimistic heading into 2018 is that Apple stock is still not expensive compared to its peers. Apple is currently trading at an earnings multiple that’s roughly 20 percent below the Standard & Poor’s 500 index average. That 20 percent discount is almost exactly in line with Apple’s five-year average. Based on the previous iPhone 6 upgrade supercycle and the potential for analysts to raise earnings estimates throughout 2018, Suva says there may even be room for Apple to expand its price-earnings ratio to the higher end of its historical range.
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6 Reasons to Love Apple Inc. (AAPL) Stock in 2018 originally appeared on usnews.com
