Apple stock could rise to $135 in 2017, driven by earnings growth as well as multiple expansion.
- Apple stock is exiting 2016 at valuations which are in-line/lower than their long-term averages.
- The emergence of the services segment as a key growth driver will be central to bullish Apple theories in 2017.
- Can AAPL stock carry its year-end momentum into 2017?
Shares of Cupertino, California-based Apple (NASDAQ:AAPL) have been in a sort of year-end rally. After having traded in-line with the major stock market indices for the most part of 2016, the stock seems to have broken out with some momentum in the last month of the year. AAPL stock is up 4.6% in the last one month (since Nov 29), outperforming the 1.3% rise in the Nasdaq Composite (INDX:COMPX) and the 2.2% gains made by the S&P 500 (INDX:SPAL) in the same timeframe. Can Apple carry this year end momentum into 2017? Well, we believe AAPL stock is headed for higher grounds in 2017 and here are 3 reasons as to why.
The iPhone 8 Super Cycle
The iPhone 8 Super Cycle, due to start with the expected launch of the new iPhone in September 2018, has been talked about a lot. There has been a lot of hype among Apple analysts and investors alike. A couple of recent analyst notes come to mind in this context. RBC capital recently added AAPL stock to its top tech stock picks for 2017. As reported by IBD, RBC analysts Amit Daryani and Mitch Steves said "The iPhone 8 could trigger a supercycle given the aging installed base of iPhones in use." This came closely on Gene Munster's last AAPL note from the desks of Piper Jaffray. The departing Apple analyst expects the iPhone 7 unit growth to come in higher than consensus while predicting next year's iPhone model to be "compelling enough to sustain high single-digit to low double-digit unit growth," as reported by Bloomberg. With major feature updates in store for the loyal Apple fan base, it is reasonable that the iPhone 8 will fly off the shelves, faster than ever. Add to this the fact that the 8 models could rake in higher ASPs and higher profit margins and the positive impact on Apple's largest revenue segment becomes hard to ignore. (See also: An Unexpected Catalyst For Apple Inc.'s (AAPL) iPhone 8 Super Cycle)
Apple Services Segment Has Come To The Fore
2016 was the year when Apple's services segment finally came out of the shadows. The services segment closed FY 2016 with revenue of $24.35B, coming in as the second largest revenue segment at Apple Inc, accounting for 11.3% of the total FY 2016 revenue. With the segment growing 22% YoY, it was also the fastest growing segment for the company, by a fair margin. With the segment occupying a dedicated discussion in each of the company's earnings conference calls in 2016, it's clear that the segment is now a central piece of the Apple puzzle. The fact that the segment is reportedly operating at nearly 60% gross margins makes it crystal clear as to why the segment will be at the heart of most bullish Apple theories in 2017. For eg: the analyst notes cited above from RBC capital and Piper Jaffray were both optimistic of Apple's services segment. (See also: Apple Services: A Giant Is Growing Within Apple Inc.)
Apple Valuations Are Off Their Long Term Averages
Apple stock is exiting 2016 at valuations which are in-line or lower than its long-term averages. The stock currently trades at a trailing twelve month (TTM) PE of 14.12 (based on December 28 close price). This is marginally higher than its 5-year average multiple of 13.6 but lower than the 10-year average multiple of 20.5. However, the 1-year forward multiple of lower than 13 is what makes AAPL stock attractive as we enter a year which will see at least 2 clear fundamental drivers.
With the revenue/earnings contribution from the services segment expected to grow, AAPL stock could also benefit from an expansion of its earnings multiple in 2017. Analysts expect the company to report $9.01 in EPS in FY 2017. A 15X forward multiple puts Apple stock target price at $135, implying a further 15.6% upside from the last traded price. And well, this does not account for earnings surprises over the course of FY 2017. With Apple having delivered earnings surprises in 3 of the last 4 quarters, earnings beats over the coming quarters could also lift the stock higher than the $135 level.
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