The narrative around Apple (AAPL) frequently portrays the iPhone and its accompanying launch cycle as the primary driver of stock performance – the flagship product leads the way, with all other revenue sources trailing in its wake. Morgan Stanley’s Kathryn Huberty, on the other hand, believes it is time to re-examine this narrative.
Huberty points out that, over the last five years, AAPL stock has climbed by roughly 500%, greatly exceeding the S&P 500’s 105 percent return, yet iPhone revenue has only increased by 40%. As a result, other items must be driving the share gains.
“In 2014, Apple didn’t even have a major Wearables business,” writes the 5-star analyst, “but today, Apple Watch, AirPods, and other Wearables & Accessories are a $38B market – the size of a Fortune 120 firm.”
This isn’t the only example. Investors may have questioned Apple’s ability to further monetize its Services business five years ago, but sales have more than doubled in the last four years, and it currently earns almost $70 billion in annual revenue.
Huberty believes that over the last five years, around 6% of Apple’s total annual revenue has come from goods or services that did not exist five years ago, citing Apple Watch, AirPods, Apple TV (the hardware), Apple Music, Apple TV+ (the streaming service), and Apple Pay as examples.
Okay, this is all really interesting, but what does it all mean? The analyst elaborated.
“Today,” Huberty writes, “we know that Apple is developing on products to address two fairly large markets – AR/VR and Autonomous Vehicles – and we believe valuation would need to reflect the optionality of these future opportunities as we get closer to these products being a reality.”
Simply said, the release of these future items should be factored into Apple’s valuation, and Huberty concludes that Apple shares needs a price target increase.
Morgan Stanley expects AAPL to reach $200 (up from $164), a Street-high target with a 14 percent return. Unsurprisingly, Huberty assigns the stock an Overweight rating (i.e. Buy).
The rest of Wall Street’s assessment of Apple is split. On the one hand, the stock has a Strong Buy consensus rating based on 22 Buys, 5 Holds, and 1 Sell. AAPL stock, on the other hand, has just hit a new all-time high, and, contrary to Huberty, most analysts believe the shares have run their course for the time being; based on the $169.28 average target, they are likely to remain rangebound for the foreseeable future.