In a report assuming coverage on tech hardware companies, Credit Suisse analyst Shannon Cross raised the firm’s rating on
(ticker: AAPL) to Outperform from Neutral, though the stock has fallen 0.1% in early trading Wedneday. In doing so she offered four reasons for her optimism.
Reason No.1: A lot of people use Apple devices. Cross noted that more than 1.8 billion iPhones, computers, and the like are in circulation, which helps spur uptake of the company’s services and software, while also keeping them around as customers. “By designing and building Apple software and services for Apple’s custom hardware, the company produces a differentiated product portfolio with leading feature functionality,” Cross wrote.
No. 2: Apple’s services business will help its profit margins. Apple’s hardware business is great, but its services business is a real moneymaker. Cross noted that the company’s services segment generates a gross margin of more than 65%, and she expects it to continue to grow as both a percentage of revenue and overall profits.
No. 3: Overall margins aren’t too shabby either—and should continue growing. “We estimate gross margin will continue to trend around 43%, with inflation and currency headwinds offset by higher Services revenue (growingdouble digits) and vertical integration of components,” Cross said.
No. 4: Apple has a ton of cash. Apple is sitting on about $192 billion in cash, which should allow it to do whatever it needs to do to drive returns. Needs to do some R&D? No problem. Return cash to shareholders with dividends and buybacks? Easy peasy. Make an acquisition? Sure thing (as long as it can get regulatory approval).
Add it all up, and Cross sees Apple stock hitting $201, up 17% from Tuesday’s close of $172.03. That’s all well and good. Our only problem with the call (which likely has more to do with the timing of Cross assuming coverage of the company) is that Apple stock has gained 32% since bottoming on June 16. With the upgrade, 79% of analysts covering the stock now rate Apple an Overweight or equivalent.
Is it too late to chase?
Write to Ben Levisohn at firstname.lastname@example.org