Apple Is A Buy, Even If You Have Doubts About The iPhone

Shares of Apple Inc. AAPL were trading higher by nearly 1 percent early Monday morning after analysts at KeyBanc turned bullish on the stock. The firm's Andy Hargreaves upgraded Apple's stock to Overweight with a newly assigned $187 price target.

The prior Sector Weight rating on Apple's stock was based on expectations that iPhone sales will stagnate, Hargreaves explained in his upgrade note. While investors should still remain "somewhat pessimistic" concerning the iPhone's growth profile, the company has succeeded in expanding a market segmentation strategy that is driving average gross profit per user higher than previously expected.

Increased visibility into Apple's ability to realize greater pricing power and growth from services like the App Store implies the company is a "franchise with subscription-like qualities" and not just a "regular hardware business," Hargreaves continued. In fact, the importance of Apple showing unit volume growth has now diminished which in turn improves the risk to reward profile for owning Apple's stock.

This fact alone helps support a higher trading multiple for Apple's stock above its recent historical average, the analyst emphasized. Specifically, a more appropriate range for Apple's stock is 7x to 10x EV/EBITDA, or an average multiple of 8.5x through positive and negative cycles. This represents upside to the average multiple of 7.0x over the past four years.

A 7x to 10x EV/EBITDA multiple equates to a 13.5x to 18x P/E multiple on fiscal 2018 estimates, the analyst added. This also appears to be an encouraging multiple as it still represents a discount that is "well below" the current S&P 500 multiple of around 24x.

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